Have you been thinking about moving money from bond funds into stock funds? Wait. This idea is appealing when bond yields are low and the stock market is doing well. However, we own bonds for when the stock market is not doing well. Below the table, we dissect two of the more common arguments for putting your whole portfolio into stocks rather than bond funds.
Not all bond funds will provide you protection from the turbulence of the stock market. If you want a bond fund that will act as a shock absorber to the stock market, we suggest that you choose of one of the funds below. All the funds are "Core Bond Funds" and rated four of five stars by LB Bond And Mutual Fund Ratings. You can see their ratings here.
The funds listed hold a portfolio of high quality, low risk bonds.
Fund Name | 12 Month Return | SEC Yield | Active or Passive? |
DoubleLine Total Return Bond Fund (DLTNX) | 8.49% | 4.88% | Active |
PIMCO Total Return Fund (PPTDX) | 12.14% | 1.83% | Active |
Vanguard Total Market Bond Fund (BND) | 5.17% | 1.70% | Passive |
iShares Barclays Aggregate Bond Fund (AGG) | 4.97% | 1.54% | Passive |
Western Asset Core Plus Bond Fund (WACIX) | 8.26% | 2.21% | Active |
Should you own a bond fund?
Yes. You have probably heard many arguments that have been recently marshaled against owning bond funds. Here are the major ones:
1) Yields are incredibly low. They only have one place to go: higher. This would send the value of bonds and bond funds down.
2) The expected returns of stocks are much higher than bonds. With everyone living longer, you need to build a bigger nest egg. For many people, a bond heavy portfolio will not allow them to retire without dramatically reducing their expenses.
Both of these arguments have serious flaws.
1) It's hard to predict the future. For many years, well-known market figures have been predicting that bond yields will rise. During that time, yields have gone lower and lower. Those that avoided bonds would have missed out on a huge rally. Because we cannot predict the future, we diversify. There is a saying, "Economists have predicted 10 of the last 3 recessions."
If the stock market crashes, you want to have a big chunk of your portfolio in bonds. While bonds might lose value during a market crash, they will lose much less value than stocks, reducing overall losses. Bonds serve as a shock absorber for the volatility of the stock market.
2) Owning stocks does mean more returns, however, it also means more risk. The odds are in your favor that you will be better off, however, there is more than a small chance that you will be much worse off. You can think of having a good portion of your portfolio in bonds as an insurance policy. With insurance, you're paying money (giving up potential returns) to receive help if something bad happens.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
