Do I need Bonds in my Portfolio?

Yes, if you need your money in the next few years

Look at the chart below:

• These are S&P 500 annual returns (from weekly data) from June 1990 until June 2020
• The higher the bar the most likely the outcome
• The outcome is on the horizontal axis e.g. a return between 10% and 15% occurred in 16% of cases
• The best outcome was a staggering 81% annual return and the worst was 46% annual loss

Why? In c. 15% of cases the S&P 500 experienced annual losses — sometimes, quite steep

Bonds improve positive returns

The chart below includes a mix of 40% Bonds (iShares AGG ETF Benchmark) and 60% S&P 500 which is by far the most popular asset allocation strategy these days:

• These are S&P 500 annual returns (from weekly data) from June 1990 until June 2020 with monthly re-balancing
• Your chances of positive outcomes are over 90%
• The best is c. 71% annual return and the worst decreased to 29% annual loss (from 46% above)

Bonds don’t materially reduce the frequency of losses (still c.10%) but massively improve their magnitude

Conclusion: Do I need Bonds in my Portfolio?

• Unless, you’re investing for very long term (10+ years), you need bonds in your portfolio because your risk is vastly reduced and chances of higher returns increased
• Also, you may want to hold Bonds that are very high quality and “pop” during a crisis (i.e. increase in price given a flight to quality)
• Holding high quality Bonds would further allow you to benefit from a Crisis and buy cheaper Equities because for a 1% drop in Yield Bond ETF prices may rally in the double digits (assuming long duration Bonds)
• Bonds will give you flexibility to re-balance your portfolio at the moment when you need it most, but otherwise will still generate 1–2% yield (assuming your Bond ETF is not only Treasuries that have low yield)
• Higher Yielding Bonds e.g. Corporates may seem attractive (since you buy alongside the FED) but they don’t provide the same security — see how they behaved during the Coronavirus Sell-off and which ones the FED currently holds

READ Bonds vs Gold — 5 Factors affecting Gold Price and their Current Potential

What percentage of Bonds do I need to hold?

If you want to see what percentage of your portfolio should be invested in Bonds and you invest for the short term e.g. year or two check this simple 2 ETF Portfolio

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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.