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Bonds as ballast in turbulent markets

25 March 2020 | Markets and economy

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Tim Buckley: Greg, we get the question from clients a lot now about bonds in their portfolio. Like they hold a bond fund and they'll come out and say it's not really insulating me from the downturn. I still have losses in my overall portfolio and there's some days where bonds actually move with equities and everyone thinks they hate when one zig the other ones are going to zag. Now that happens over time but not every day and maybe explain a little bit of how you see a bond fund in someone's portfolio. Diversification it is providing.

Greg Davis: I mean the best way to think about it, just look at what we've seen year to date. We've seen Total Bond Market is one example. It's a broad-based bond fund that covers credit, Treasuries, mortgages, things of that nature. It's up 1.3%. The S&P 500 is down about 30%, so a lot of diversification and balance that you're getting from owning a bond fund. Yeah, on the inter-day basis, you could get co-movements, but the reality is it's a great diversifier for investors and allows you to have a tool to rebalance when you see a sell-off in the equity markets.

Tim: And we've yet to find the portfolio that's built for growth. That's going to insulate you totally against losses. The way to insulate against losses is go 100% cash and you're going to regret that over 10-20 years.

Greg: Right. Because you end up having inflation and you're going to have a hard time keeping up with inflation over time.

Tim: So your purchasing power drops, and so you see no real appreciation.

Greg: That's exactly it.

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All investing is subject to risk, including possible loss of principal.

There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments.

Diversification does not ensure a profit or protect against a loss.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.

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