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FRI, JUN 23, 2023

Are Investors Right to Fade Bonds?

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Gallup surveys this year show investors are giving less attention to bonds, even as they reach retirement age. Given the run stocks have had for the last 15 years, is that the right call? Jon Fortt is here to weigh in.

JON:

“Yes, it’s been the right call to ditch the old 40% bonds, 60% stocks portfolio rule

to go with fewer bonds and more stocks. Just look at performance. In stocks, the S&P 500 has returned about 700% since the lows of the financial crisis in 2009. Meanwhile interest rates have been low for most of that time and then heading higher, so bonds and other fixed income assets haven’t been nearly as rewarding.

Retail investors can also put more money into stocks these days because we’ve gotten a major upgrade in the tools available. Smartphones let you trade on the go, and access the latest research. And technology continues to redefine the stock market as we’ve moved from the mobile revolution, to the cloud revolution, to the omnichannel revolution, to artificial intelligence today. In another time, it made sense that investors would gradually shift into mostly bonds for capital preservation as they got older.

Now there’s more opportunity to take informed risk. I’m not saying there’s no place for bonds. They just don’t need to play as big a role in a mature, balanced portfolio as they used to.”

With interest rates higher now, doesn’t that change the landscape?

JON:

“On the other hand, we’re in a golden moment for bonds right now, and investors need to pay attention.

Prime example? Municipal bonds. I know you’re tempted to nod off, but please don’t. I know what you’re thinking. What could be more boring than lending money to state and local government to build schools and roads and hospitals? Fair.

But check this out: The distributions you get from munis and muni funds are often exempt from federal taxes. If you’re in a high tax bracket, that’s a big deal. For example: Let’s say you can buy into a muni fund yielding 4%. That 4%, shielded from federal taxes, is like getting 7% on a CD. Seriously, plug it into a tax equivalent yield calculator online, it works. Now, 7% is what we’re taught to expect from stocks long-term. If you can get that from lower-risk bonds right now, why wouldn’t you lock some of that in?

What I’m saying is, investors need to be able to walk and chew gum at the same time. Yes, tech is important, equities are important. But look at your portfolio, look at your goals. If you’re not looking to trade bonds — if you’re looking to hold them — the yields on some fixed income are at a really special place.

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*Why LinkedIn? On the Other Hand is about civil debate that illuminates the relevant facts. We’ve found that LinkedIn does a good job fostering that kind of environment.

On the Other Hand is Jon Fortt’s weekly segment on Squawk Box, Thursdays in the 7 a.m. ET hour. He’s been writing it just about every week since August 2020. The second (or first) argument each week isn’t necessarily the one Jon agrees with. He just makes an honest effort to construct the best argument he can for each side.

When he’s not debating himself, Jon co-anchors Overtime at 4 p.m. alongside Morgan Brennan. Jon also researches and writes the weekly Working Lunch segment on Power Lunch, Fridays in the 2 p.m. ET hour, where he introduces viewers to founders and CEOs through their origin stories and strategic goals.