The Importance of Owning Bonds in Your Portfolio

When people find out that we work in wealth management, they often ask us different versions of the same questions: “What’s going on with the stock market?” or “what do you think about so-and-so stock?” We rarely get asked about the bond market, despite it being arguably one of the most important components of any financial portfolio. In 300 words or less, we’ll attempt to address what a bond is, what it does, and why it’s important for you to own them (if you don’t already).

A bond is debt issued by a government or corporation. When you buy a bond, you’re lending money to these issuers in exchange for regular interest payments (AKA “yield”). The amount of yield paid out to you will vary based on the quality of the issuer. The higher the quality of the issuer, the lower the yield will be, and vice versa. While a high quality 10-year U.S. treasury bond is currently paying less than 1% yield (as of this writing), a lower-quality bond may be paying in excess of 10% yield. But that higher yield comes with much greater risk, such as default. If the company (or government) has financial difficulties, they may not be able to fulfill their obligation to pay you back.

So, why own bonds? They not only provide yield but also act a buffer against stock market volatility. Relative to stocks, bonds (when properly diversified) are less volatile. They can help smooth out the ride when things get bumpy. In our final 37 words, we’d like to mention that the bond market can be tricky to navigate, but we’d love to help! Please contact us if you would like us to review your current bond holdings to see if you’re properly diversified.