Remind Me Once Again...Bonds Aren't So Bad
With paltry yields getting even paltrier (yes, it's a word), it's reasonable to ask whether bonds are still worth owning. That question was addressed in "The Intelligent Investor" column of the Wall Street Journal just last month.
First, context is everything when it comes to investments. Zweig points out that returns should always be measured relative to inflation, which is something we have focused on in recent discussions. Keeping ahead of rising prices is really the ultimate goal of investing. The "real" (after inflation) yield on bonds is actually better than it has been at other times in history due to the fact that inflation remains very low. Investors often long for the higher yields of the past despite the fact they often ended up being negative after inflation. It's easy to focus on nominal "top-line" returns without considering the circumstances, but real returns are what truly matter.
Second, the fear of rising interest rates should not preclude anyone from owning bonds. It's true that bond prices decline when interest rates go up, but that's only part of the story. Rising rates also mean that interest income can be reinvested at higher yields. Falling bond prices in the short-term are paired with higher yields in the long-term, and the benefit of attractive reinvestment grows over time.
Zweig's final point regarding bond ownership is arguably the most important. High quality bonds are still the safest way to counteract the risk of holding stocks. It is your safety net. It's a point we've made a number of times over the years, but it's a good reminder nonetheless. Bonds still make sense, even at today's skimpy yields.