Second Quarter, 2023
Bonds, What Are They Good For?
Past investment history shows that stocks outperform bonds over long periods of time but with much more volatility. This 2Q23 letter suggests that investors, however, should look to the future, not the past, to assess the prospects of bond investing going forward.
Simple math lesson #1 re: bonds: Total return = change in price + interest received.
Simple math lesson #2: When interest rates go up, prices of bonds must go down to equalize existing bonds to new ones.
The silver lining is now bondholders get paid higher interest going forward to compensate for lower prices.
And assuming no defaults or downgrades, bond prices rise from lower levels to par value of 100 as time passes.
KEY MAGIC INGREDIENT = PATIENCE. Patience can pay off as future returns from rising prices and higher interest received can improve total return as time passes (remember math lesson #1.)
Recently as the Federal Reserve has battled high inflation by rapidly raising interest rates, The Bloomberg Aggregate Bond Index lost 15% in 2022, according to FactSet. So why bonds now? Look to the future, not the past. The combination of lower prices and higher yields now bodes well for the future of bond investing. Current higher market interest rates can set bond investors up for attractive future total returns. Back to simple math lesson #1: Total return = change in price + interest received going forward.
Let’s use our W&A actively managed portfolio of five diversified bond mutual funds as an example: Current average price = $89.15. Current yield = 5.28%. Opportunistic cash in the portfolio to put to work = 24%. W&A clients are looking to the future, not the past, to assess the potential for “Bonds, What Are They Good for Now?”
– Phyllis
