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Are Bonds "Safe"?


SUMMARY. Generally, speaking investors seek safety in bonds vs equities or stocks in times of uncertainty. In addition, for portfolios that desire to take risk as you age or that have short time tables for accessing money such as when you near retirement, bonds are used as "safe" investments. This is what occurs in normal times. However, these times aren't normal as government bond yields are BELOW 1% for a 10 year time horizon. With inflation at or above 2% that means bonds that have such low returns if inflation is included will get a negative return! Meaning the returns on your money won't even keep up with price increases in every day goods and services you buy! That doesn't seem that attractive if one has a long enough time horizon. As the economy recovers (and that is an assumption for 2H20), bond prices may fall and yields may rise making these investments even less attractive. That's not to say bonds don't have a role in a portfolio, but one should consider the long term returns of such assets in providing adequate returns over the long term to achieve stated financial goals.


INVESTMENT IMPACT. In our model portfolios, in recent weeks, we have increased exposure to higher yielding assets such as stocks and preferred stocks that have significantly higher yields vs bonds. Across our model portfolios, current yields based on current dividend rates are over 4% vs government bonds which yield well under 1% over the next 10 years. That's not to say these dividends can't get reduced vs a yield of 1%, but longer term the risk/reward appears favorable. We still maintain some bond exposure, but much less than historic levels. By ACTIVELY managing portfolios we constantly weigh such risk/rewards of certain asset classes.


For more insights see our website and disclosures found there at BCA. As always contact us for further explanation of how these events can effect your finances.