A friend asked me this question the other day. At the time of writing this article in Nov 2022, bonds are suddenly in vogue and everyone is clamoring for investing in bonds. I told him while bonds are an age-old, time and tested asset class, but for the average, simple (Read: not so sophisticated – basically someone like me) long term investor, don’t stray from your asset allocation strategy based on what you see in the news. While this article references the current times, the information in the article should inform an investor on determining the best course on bonds independent of what is happening in the market at a given point of time, unless they are bond traders.
So why are they considered so good now (in 2022)?
Simply put, because they are offering better returns than stocks now in 2022. That’s the short answer. Now, let me give you the long answer. We talked about the relationship between interest rates and bond prices and yields in the article last week. So that should help you understand that currently in Nov 2022, the US Federal Reserve is hiking interest rates rapidly for reasons I have explained in the article ‘Why should I care about what the Central Bank does’. This is causing bond yields to go up.
But why do I care if bond yields go up? Stocks always go up even higher, right? Well, in 2022, the US total stock market as of the time of writing this article was down around 22%! And bond yields on US treasuries which are considered almost zero risk are around 4%! You don’t need to be a math genius to understand why people are rushing toward bonds.
If that’s the case, why don’t I just move all my money to bonds?
So everything I described is the situation in 2022. If you are a long-term investor with a horizon of 10-20 years, you should still expect stocks to return more. And as I described in the article relationship between interest rates and bond prices and yields, if you are looking to sell bonds in the secondary market, the yields will go up or down depending on the interest rates at that point in time. Nobody was talking about bonds in the past few years when stocks were returning 20% returns. So, always look at this over a longer time horizon.
That’s why I said – stick to your asset allocation and put whatever you want to, in bonds depending on your strategy. Don’t change that because of what is happening in the market currently. Now, there could be a few exceptions to this where you might be trying to be a bit opportunistic, but I would caution you on trying to time the market. I have personally not changed my asset allocation in bonds in 2022. I am sticking to my strategy.
So what are the bonds I should be looking at?
I detailed the different types of bonds in the article ‘Do bonds have a place in my financial portfolio. In specific, the different bonds issued by the US Treasury are capturing everyone’s attention now because they are practically risk-free (remember, there is no such thing as risk-free but US Treasuries come pretty close) and yielding high returns (relative to stocks) now. I want to just showcase a couple of them here in this article.
- This past year, I did go with the crowd and invest the maximum for my wife and I in Series I savings bonds issued by the US Treasury. At a juicy 8+% return and for the idea of keeping it just for a year or more was an example of me being opportunistic. I will likely take the money out at some point in the latter half of 2023. After 1 year of investing the money, you can withdraw it anytime (with a penalty of 3 months interest rate if you withdraw within 5 years which is really not a big deal). So in my mind, this is a supplementary emergency fund or cash I have parked for more short term needs.
- Investing in broad based ETFs/funds for the federal government issued bonds is a great idea in general because they are the easiest way to buy and sell them in the secondary market. You can see the prevailing treasury yields here at the US treasury website. Some examples are the iShares US Treasury Bond ETF (GOVT), Schwab Long Term treasury ETF (SCHQ). I am not recommending any of these in specific – simply identifying some examples of broad based Treasury ETFs. As part of my overall asset allocation, I have mostly invested in broad bond market ETFs – nothing complicated or fancy.
Of course, as I mentioned, there are many different types of bonds that are yielding all sorts of returns now.
Concluding comments
This discussion on bonds is no different from any other asset class that suddenly is doing very well in a given year. Remember a few years back when Bitcoin was all the rage and everyone was putting money in it? Or real-estate? As I have always said, understand the asset class, have a clear idea as to whether you want to invest in that asset class (after making sure you have researched it well and sought the input from people who understand it), and invest as much as you think you need based on your overall asset allocation strategy. Don’t get seduced by the news articles and make investments on a whim.
Thank you for reading and I wish you luck on your financial journey.
Disclaimer: I am not a financial advisor and all the information in my articles are from my personal experience and are for informational and educational purposes only. Please consult with a financial advisor or CPA for professional advice.
