With Interest Rates Falling, Why Do You Own Bonds?

Money For the Rest of Us

J. David Stein

Investing, Investing Podcast, Business, Economics, Economy

4.5 • 1.4K Ratings

🗓️ 5 June 2019

⏱️ 30 minutes

🔗️ Recording | iTunes | RSS

🧾️ Download transcript

Summary

How an asset class such as bonds can play different roles in your portfolio depending on your investment philosophy.

In this episode you will learn:

What are bonds and how can they be used in investment portfolios.
What is interest rate anticipation.
Why individuals have an advantage over institutions because they don't have to worry about outperforming a benchmark when it comes to bonds.
Why U.S. interest rates could rise and fall from current levels.
Why China is unlikely to sell all of its U.S. Treasury bonds.
Examples of higher yielding strategies other than bonds that can benefit from falling interest rates.

Thanks to LinkedIn and Policygenius for sponsoring the episode.

For show notes and more information on this episode click here.

[0:20] Generating a return on bonds.
[2:22] David explains why his own portfolio has not seen huge success in bonds.
[3:56] What is the role of bonds in your portfolio?
[6:41] A historical analysis of bonds.
[9:55] The advantage of being an individual investor.
[10:59] Speculating whether or not interest rates will go up or down.
[14:50] The effects of the global economy on US bond behavior.
[17:12] Strategies for diversifying your portfolio.
[20:49] What to focus on as an individual investor in bonds.
[22:19] Comparing the story of the carpenter and the tree to the life of a bond.
[24:23] Deciding which path to choose for the use of your bonds.

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Transcript

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0:00.0	Welcome to Money for the rest of us. This is a personal finance show on Money,
0:06.0	How It Works, How to Invest It and How to Live Without Worrying About It.
0:10.8	I'm your host David Stein today's episode 255. It's titled. With interest
0:16.3	rates falling, why do you own bonds? Last week we reviewed the case for investing all of your assets in stocks.
0:27.0	We recognize if you do you have to be willing to lose 60% or more of your investment portfolio when stocks plummet because stocks do and you have to have the fortitude to ride it out.
0:42.0	Many of us, including me, we don't have that. We don't have the ability
0:47.6	to ride the stock market up and down like a roller coaster. So we diversify and own other asset types. One of those
0:56.4	asset categories that we own is bonds. Bonds, also known as fixed income, are debt instruments.
1:04.0	They're issued by governments and corporations.
1:08.0	Those entities borrow money, and then they pay interest on that debt,
1:12.0	and when the bond matures they return the principal.
1:16.0	The value of bonds varies as interest rates change.
1:20.0	As interest rates go up, the value of bonds fall, and as interest rates fall as they have done this year,
1:29.0	then the value of bonds goes up.
1:32.0	The broad U.S. bond market, the Bloomberg Barclay's
1:36.6	U.S. aggregate bond index has returned 5% this year. Long-term U.S.
1:42.0	treasuries have returned over 10 percent, but not in my portfolio.
1:47.4	My largest bond fund has only returned 2.8 percent year to date. I have a bank loan fund, it is a floating rate
1:56.9	fund that's returned 4.6%, but I also have ultra short-term bond funds that have
2:02.0	returned 1.6 to 2%. The competitive side of me, the
2:06.8	one that used to be an investment manager in working to outperform a benchmark for my clients.
2:12.4	It feels bad when the bond market is up 5% and yet my
	...

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