Bonds

‍ Are They Still Stocks’ Financial Anchor?

For decades, bonds have been paired with stocks because they were less volatile, provided a cushion when stock markets dropped, and provided a steady income.  Let’s consider each of these three attributes that made bonds a financial anchor.

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Volatility

There is no question that bonds are less volatile than stocks.  Short of countries going bankrupt, high volatility is highly unlikely in bonds.  Much safer than the daily churn of the stock market.

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Cushion

Because bonds are fixed income sources, their lack of volatility means they will remain relatively safe during the inevitable stock market drops.  They would deliver a smaller or negative return in a year where the stock market drops or crashes, but overall, they haven’t fallen far relative to how dramatically the market can move down in a single year.

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Steady Income

Bonds delivered a total return income generation of 6.7% from 1976 to present.  Over 6% is very good, stocks or bonds, certainly enough to not worry much about retirement plans.

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But the total returns have dropped to 0.2% since 2021 and 1.4% since 2016.  That’s in Canada.  In the US, they are 0.06% since 2021 and 1.5% since 2016.

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If you remove the last 10 years data from the since 1976 data, then gains were over 7%.  Even better.  No wonder the traditional balanced portfolio included 60% stocks and 40% bonds.

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In summary, 7% was certainly a steady bond income for four decades.  However, the last decade has delivered a paltry 1.5% return, including an even lower near 0% return for the last five years.  This is before inflation and advisor fees.  I’d say the steady income attribute no longer applies.

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Is Steady Income From Bonds Gone?

In the coming years or decades, probably yes.  Why?  We are now in a period where the low inflation with low and zero interest rates along from the last few decades are behind us.  Higher inflation with higher and rising rates has caused the near-zero bond return and this period is likely to continue for some time yet.

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Financial Anchor Options

To stick with fixed income for low volatility and market drop cushion, two great options to replace the bond markets are:

·         High Interest Savings ETFs, currently yielding 2.1%

·         GICs from Canadian banks, currently yielding over 3%

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2.1% and 3% isn’t much, but it’s a lot more than 0% to 1.5%, and is more-or-less covering inflation at present.

Don’t settle for what used to make sense.    Be Prepared.  Do some research.  Talk to your advisor.

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