With the media bombarding us daily with news stories through TV, newspapers, and the internet, it’s difficult for avid readers to keep up. One thing you can’t do is rely solely on the headlines. For instance, yesterday a story came out with the headline “Bonds a Safe Bet? ‘Baloney’.” From reading the headline, one would assume that all bonds are a “bad” bet. Well, read a few lines into the article and you find, “…investors pouring their money into government bonds for 30 years at interest rates hovering around 3% is not a very good idea…” Wow! There is a big difference between a 30-year treasury bond and a 3-year corporate bond! There’s not enough time to get into the reasons why bonds with diverse characteristics react differently to various economic changes, but let’s just say there are differences.
Bonds can certainly have price volatility when economic conditions change (interest rates, credit risk, etc.), but knowing how these changes affect YOUR portfolio is what’s most important. Bonds and other income holdings can provide a retiree with consistent cash-flow, certainty, low volatility and a high sleep tolerance. However, due to the fact we are at historically low interest rates and there is such uncertainty in the economic climate, we feel that the structure of an income portfolio is very important in order to protect against future higher rates and inflation. Bonds have had an easy ride for the past 3 decades…so diversification, structure, and realistic expectations are as important as ever when managing for income.