I ’ve said it before: No one likes bonds. They’re boring, they don’t have much opportunity to appreciate in value, they can be rather complicated and their income is generally subject to unfavorable tax rates. Yes, there is a subset of investment geeks who like bonds, who revel in the mathematical complexity of things like duration measures and the negative convexity of the mortgage bond market. For most people, however, bonds are simply a necessary evil.
In today’s low-interest-rate environment, the income bonds produce has dwindled significantly. Intermediate-term Treasury bonds generally pay interest that is below the rate of long-term inflation. You also have the risks of rising interest rates and future inflation.
Increasingly, I am asked why we bother to hold bonds at all. The answer, of course, is risk control. While bonds may be tough to love, they do have a place in most investors’ portfolios as a hedge against stock market declines.
Bonds’ more likable cousins, stocks, allow for significant growth, but they also have a nasty habit of losing lots of value at inopportune moments. Most investors wouldn’t be able to take the risk of an all stock portfolio. Accordingly, a balanced approach that incorporates stocks for growth and bonds for stability is warranted. Clearly, not everyone agrees. Bond mutual funds saw record outflows of $86 billion in 2013, showing they are out of favor, at best. Investors are dumping bonds because they are producing scant income and are subject to further losses if interest rates and inflation rise…..