• Thu. Sep 28th, 2023

Bonds are having a terrible year. Should I still invest in them?


May 11, 2023 #bonds, #invest, #Terrible, #Year

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Welcome back to “Ask an Advisor,” the advice column where real financial professionals answer questions from real people. The topic can be anything in the world of finance, from retirement to taxes to wealth management — or even advice on advising.

The U.S. government has been issuing bonds since the American Revolution. For centuries, these debt securities — essentially loans to the government, repaid with interest — have helped fund Uncle Sam and offered investors stable, conservative alternatives to stocks. 

But do bonds still make sense in today’s economy — which has been, to put it mildly, unusual? 

For the past year and a half, Americans have simultaneously faced both a volatile stock market and record inflation. To tame prices, the Federal Reserve has raised interest rates 10 consecutive times, bringing the federal funds rate to 5 to 5.25% — its highest point since 2007.

This has been both good and bad for bonds. On one hand, the Fed’s actions have sent bond interest rates soaring. For example, at the start of 2022, the yield from a six-month Treasury note was 0.22%. Today it’s at 5.18%.

On the other hand, the high interest rates have depressed bond prices. The Barclay’s U.S. Aggregate Bond Index, for instance, was down 13% by the end of 2022 — its worst year on record.

All of this has left bonds in a confusing place. Do government securities still have an important role to play in investment portfolios? If stocks and bonds are suffering at the same time, can one act as a hedge against the other? One novice investor in New York is struggling with these questions and turned to our finance-savvy readers for help. Here’s what he wrote:

Dear advisors,

Is there any reason for a relatively young person to allocate to bonds in this environment? If the Fed continues to hike up interest rates, bond values go down. If the Fed lowers rates, bonds go up in value but presumably the stock market will appreciate even more. 

I’m a 36-year-old tech worker, and I have about $100,000 invested in index funds and $30,000 in my 401(k). I have two main goals: funding my startup, which I’m planning to launch soon, and saving for my retirement. I’d like to diversify my assets, but I’m just not seeing the advantage to investing in bonds. Am I missing something?


Skeptical in SoHo

And here’s what financial advisors wrote back:

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