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Should You Own Bonds? (Part 2)

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  • Should You Own Bonds? (Part 2)

by | May 2, 2022

As stated in Part 1 of this article, it depends.  Same answer as before!  In Part 1 of this series, I tried to add perspective to the recent downturn in bonds and to describe how bonds mitigate risk relative to stocks.  Bonds can be a good risk mitigator in a portfolio.

However, that doesn’t mean you must own bonds.  I think it is safe to say that history has proven, especially in inflationary periods, that stocks outperform bonds.  That is only one part of the equation though.  Can YOU accept the risk of a 30% to 35% plus drop in your portfolio?  The answer to that is likely going to be based on your age and whether or not you are taking distributions now or plan to in the next 2 years or so.   There is a term called decumulation of assets.  If you have $100, are taking $5 out a year and the market drops 20%, you are down 25%.  You need an approximately 40% return to get back to $100 ($75-next year’s $5 distribution = $30 to get back to even).  It is a staircase going down, not up.

If you can’t or don’t want to accept a 30% to 35% drop in your portfolio, you must diversify in other investments other than stocks.  It really isn’t a question of whether you should be in bonds but rather what you are going to use for risk mitigation.

At Virtus, we are attacking this issue a bit differently.  In a traditional moderate risk portfolio, which is approximately 60% stock and 40% bonds, we are cutting our bond portfolio in half (actually bit more than half) and diversifying into alternative investments.  An alternative investment is any investment which is not a stock or bond.  This strategy has been rewarding so far in 2022 relative to having all of one’s nonstock portfolio in an aggregate bond index.  This is the compromise between all stock risk versus the lack of upside in bonds going forward.  It does add a more risk but not nearly the same as having 100% in stocks.  The more non correlated assets you have in your portfolio, the less risk over time.  If I don’t, my lawyers will make me add, rightfully so, diversification does not prevent losses.  That isn’t even the goal because that is unreasonable.  The goal is to minimize losses when bad markets happen and reduce volatility.

If you would like more information, please contact Brian Tillotson at Virtus Wealth Management.  Never forget, it is about your risk tolerance, not mine, your friends, or some radio or TV personality.  Your portfolio should be customized for your goals and objectives.

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