How to make the Bond Bear feel less scary. 

    I get it. There is an opportunity cost, on average, for owning bonds as opposed to stocks. With that comes more risk. Recently, many prominent investors have written about the end of the prolonged bond bull market where both income and capital appreciation have been ample. Does this mean they are pushing for stock ownership? Here’s my problem with this idea.

    If you, like most people, are going to own index funds, especially when it comes to bonds, no matter what happens to yields, over the long term you will receive the coupon on your bond. That is to say, assuming there is no default. So what’s the big deal? If a bond gets crushed because yields rise, at the end of the term you’ll still get your capital back. So you get safety and a coupon if you are a passive investor.

    Why then go into stocks with all of your might, especially at these levels? One may make the argument that, what if a large number of bonds default? Well, then the associated stocks will be worthless. If you’re an active manager, this s a valid worry, but if not, I wouldn’t. So, other than this, what is the worry? You could argue that a portfolio of BOTH stocks and bonds will lower overall risk, and I often do. What’s more is that forward-looking expected bond and stock returns are not vastly different, especially when adjusting for risk.

    This is part logic and part rationalization of my recent move to a more conservative portfolio allocation. In all, if expectations of preservation and modest income are instilled, it shouldn’t feel like a bear market in bonds. From a passive perspective, they were never really meant for appreciation anyway.


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