Ah, bonds. They’re like the dependable friend who never cancels plans, always remembers your birthday, and doesn’t get you into trouble. But let’s be honest: over the past few years, bonds have been about as popular as landlines. Investors have been flocking to stocks, real estate, and crypto, leaving bonds in the dust.
So why am I here, waving my hands like an air traffic controller, telling you to pay attention to bonds again? Because, my friend, once in a while, the tide turns (usually related to larger cycles in monetary policy, but we will leave that topic for another day!), and bonds might just be the unsung heroes of your portfolio in the coming years.
When Bonds Were Down in the Dumps
Let’s rewind a bit. Bonds had a rough go in 2022 and 2023, with rising interest rates causing their prices to sink head-first like a leaky canoe. If you were holding bonds during that time, it probably felt like watching your favourite underdog sports team take one hit after another. I did not ask for drama; you said to yourself, why am I getting so much drama?
So why did this happen the way it did? The Federal Reserve, and other major central banks around the world, including here in Canada, raised interest rates aggressively to combat inflation. When interest rates rise, existing bonds with lower yields suddenly look less attractive compared to new bonds with higher yields. Investors dumped older bonds, prices fell, and anyone holding long-term bonds felt the pain. It was one of the worst bond markets in history - seriously, we’re talking worst in decades territory.
The alternative was not desirable either, however – imagine if they had not starred inflation down like a feisty Banksy statuette giving the hairy eyeball to the bull in the streets. With rampant inflation, sure, maybe your portfolio would have retained its value, but it would be able to purchase far less in the future, and that is just as bad if not worse than one rough year in the markets.
So, What’s Changed?
Here’s the good news: the bond market’s rough patch has set the stage for a much more attractive future. Now, bond yields are at some of the most attractive levels seen in years. That means you can most likely enjoy bonds’ typical slow and steady road to returns more comfortably than, say, throwing your money into the latest meme stock or the eleven-hundredth cryptocurrency your cousin swears is “going to the moon.”
Even better, if the economy slows down and central banks start cutting rates again (which many expect in the coming years), bond prices will actually rise. That’s right: bond investors could see both income and capital appreciation. It’s a double win, and let’s be honest, those don’t come around too often in investing.
The Role of Bonds in a Well-Balanced Portfolio
Bonds are the “grown-up” part of your portfolio. Stocks can often seem like the sexy flash in the pan part of the recipe, whereas bonds provide stability when stocks get moody and decide to throw a tantrum. Historically, bonds and stocks tend to move in opposite directions: when stocks crash, bonds often provide a cushion. That’s why balanced portfolios (think 60% stocks, 40% bonds) have been a favourite among long-term investors.
If you’re nearing retirement or just like sleeping soundly at night, bonds are your best friend. They generate steady income, help preserve capital, and reduce the overall risk in your portfolio. Even younger investors shouldn’t ignore them - having some bond exposure can smooth out the wild swings
of the stock market.
So, Should You Invest in Bonds?
If you’ve been avoiding bonds because of their past performance, it might be time to reconsider. With higher yields and the potential for price gains, if interest rates fall, bonds are looking a lot more attractive than they have in years.
Maybe it’s time to give bonds a second look. It’s also always in style to understand both your risk tolerance as well as your risk capacity - one is about how much your mind can handle, and the other is how much your actual plan can handle. Bonds might not be flashy, but in the world of investing, slow and steady often wins the race.
Gillian Stovel Rivers, MA, CFP, CEA
Senior Wealth Advisor
Assante Financial Management Ltd.
Gillian Stovel Rivers is a Senior Wealth Advisor with Assante Financial Management Ltd. The opinions expressed are those of the author and not necessarily those of Assante Financial Management Ltd. Please contact her at (905) 335-1950 or visit www.surroundwealth.com to discuss your particular circumstances prior to acting on the information above. Assante Financial Management Ltd. is a member of the Mutual Fund Dealers Association of Canada.
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