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What to do with Your Bonds

What to do with Your Bonds

August 12, 2021
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Recently, I have been receiving a lot of questions about bonds. In previous Money Smarts, I have discussed the difference between stocks and bonds. Today’s blog focus will be on bonds and what to do about bonds in your portfolio. 

Bonds don’t have a great trajectory because interest rates are low, and you get very little yield or income from bonds today. The growth expectation is also not ideal. Interest rates have been going down for over a decade -- and when interest rates go down, bond prices go up. But right now, we're in a stagnant place with interest rates. Bonds are supposed to be the safe part of your portfolio and provide an anchor. Stocks are used for growth. However, when interest rates start to rise again, bond prices will go down. Interest rates and bond values have an inverse relationship. 

So what do you do about your bonds? Do you hold them?

One strategy I have been sharing and implementing with my clients are short term bonds. Why? First, they are less subject to interest rate risk. Another option are treasury inflation-protected notes (TIPs), which attempt to hedge against inflation. You may have some interest rate risk with those, so you are not solving the problem 100%. 

Another option, of course, is staying in cash. The issue with cash is that it doesn't keep pace with inflation, and experts are projecting inflation will go to about 2.5-3.0%, after the short run of high inflation with our  current supply-demand issue. Cash is not going to keep pace with inflation, especially with the short-term high inflation period that we're in. If you want to keep pace with inflation, cash is not a good place to be.

Alternative investments that are focused on income generation can also substitute bonds in a portfolio. They are not generally correlated to the stock market, they have high income potential and they’re not usually publicly traded. Also, depending upon your financial situation, whole life, or indexed life insurance, can be a good option if you need the death benefit. These life insurance policies have some guarantees against loss and grow tax free.

Contact me with any questions that you have on this topic. It can be overwhelming. These are just some examples of strategies that could replace a portion of the bonds of your portfolio. And of course, past performance does not guarantee future results. However, these are just some strategies to discuss with your financial planner and I would love to solve this problem with you.