The Beauty of Bonds

Historically, stocks have provided appreciation that helped investor portfolios grow. Many
stocks also provide returns in the form of dividends. Stock prices have certainly gone up over
time, but the path hasn’t exactly been a straight line. There have been some queasy,
white-knuckle moments along the way when it felt downright uncomfortable to own stocks.
Patience, however, has paid off for investors if they were willing to tune out market news and focus on the long haul.
For the most part, bonds have marched a steadier path, providing income and a bit more
stability that can help investors have peace of mind about their overall portfolio. It’s helped
that bond yields have spent the better part of the past forty-plus years trending downward from
double-digit readings in the early 1980s, meaning bond prices were trending upward.
The real beauty of bonds from a stability standpoint is that they mature. Interest rates may rise
while an investor holds the bonds, meaning the bonds’ prices fall. All the while, though, coupon
payments roll in, and when a bond matures, the borrower repays the principal amount with no
impact from the prevailing level of interest rates. Those coupon payments and principal
repayments generate cash flow into an investor’s portfolio, and the investor can conveniently
match up cash flows with anticipated cash needs.
Mutual funds and ETFs can provide exposure to bonds, as well, but mutual funds and most ETFs
don’t have a maturity date, so generating cash flow from bond holdings in excess of income
means selling shares in those funds. Investors wanting to tap into bond fund holdings for cash
during 2022 and 2023 have found they’d need to sell shares at depressed prices because the
share prices reflected lower prices on the bonds the funds hold. Meanwhile, investors who had
bonds mature since interest rates started rising sharply in late 2021 simply collected their
principal repayments and went on their way, even if interest rates were markedly higher than
when the bonds were purchased.
Many investors feel they understand the stock market more easily than they understand the
bond market. They may not know which stocks they should buy, but they can follow the logic
that in the long-term higher profits should translate into higher stock prices, and they’re on
board with paying an advisor or fund manager to decide which stocks to own. Perhaps buying
bonds and holding them to maturity would help simplify the bond market for many investors.
They buy a bond that matures in 2028, and they know what principal repayment they’ll receive
that year. Investors may not feel any more comfortable picking bonds than picking stocks, but
that’s where an advisor who knows their way around the bond market can be a valuable ally.
After all, the real beauty of bonds as a portfolio stabilizer is that they mature.