Bonds remain a widely unpopular asset class as U.S. interest rates continue to hover near historic lows. The thinking is that yields aren’t enough to compensate investors, and they may end up losing value of rates rise, since bond prices and yields move in opposite directions.
But a pair of money managers on Covestor say younger investors shouldn’t give up on bonds, which can provide stability to a stock portfolio.
Bill DeShurko, who manages the Dividend and Income Plus portfolio, and Charles Sizemore, who oversees the Dividend Growth portfolio, were recently interviewed by MainStreet:
Gen-Xers and Millennials should invest now in individual bonds with varying maturities, said Bill DeShurko, a portfolio manager on Covestor, the online marketplace for investing with offices in Boston and London.”
“Now is the time to ladder individual bonds,” he said. “This way if rates do rise, you will get your investment back as bonds mature – allowing you to dollar cost average into the stock market. Timing is everything in investing. Assuming those under 40 like to make money, bonds should always be a consideration.”
Bonds have demonstrated better returns than the stock market in the past, DeShurko said. In 2002, Barclay’s aggregate bond index returned 10.26%, while the S&P 500 lost 22.10%. In 2008, Barclay’s bond index returned 5.24% while the S&P 500 declined by 37%. Even in 2011, Barclay’s bond index rose by 7.84% while the S&P 500 eked out only a gain of 2.11%.
“The greatest bull market in history was from 1981 to 2000,” he said. “An investor that bought 30-year U. S. Treasuries in 1981 and constantly maintained a 30-year maturity would have outperformed the S&P 500.”
Charles Sizemore, a portfolio manager on Covestor, said bonds “are priced to deliver competitive returns.”
“This is clearly not the case in today’s market, but recall the late 1990s when stocks were extremely expensive and bonds offered a high yield,” he said. “Buying bonds in 1998 made all the sense in the world for an investor at any age based on valuations.”
Bonds can anchor and balance a portfolio as well as provide income even if interest rates rise.
“You are using them as part of an active rebalancing strategy or as a way to lower your portfolio’s volatility,” Sizemore said. “This is a more valid rationale in the current yield environment, but cash could just as easily be used for the same purpose.”
Read the full article at MainStreet.
