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With Low Interest Rates, Should Investors Still Own Bonds?

By Matthew Frankel, CFP® - Feb 4, 2021 at 7:33AM

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Bonds are generally thought of as a source of steady income, but rates are just so low.

Traditionally, investors have been advised to keep an age-appropriate mix of stocks and bonds in their investment portfolios. The idea is that while stocks have the better long-term return potential, bonds provide steady and predictable income. 

However, with interest rates still near all-time lows, bonds aren't the great income generators they once were. In this Fool Live video clip, recorded on Jan. 25, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser answer a listener's question about whether it's still worth owning bonds at all. 

Jason Moser: Matt, let's move on here to a listener question we got on Twitter the other day. This comes from a listener with the handle @FooleryJoe. I like that, @FooleryJoe. @FooleryJoe asks, "Question for the financials episode this week, do bonds at their current yield have a place, any foolish portfolio?" I'm going to go straight to our resident certified financial planner, Mr. Matt Frankel, what do you think about this question to hear from Joe Foolery?

Matt Frankel: The short answer is it depends. It's pretty well known if you have a good investing background, bonds are also known as fixed income investments. They are generally designed to produce a steady stream of income without much downside risk to your principal. The reason is because if you buy bonds, at the bonds maturity, you get your money back. If I pay $1,000 for a bond from a company, I will get that back whenever the bond matures. The problem is right now, interest rates are so low, they're not paying much of anything.

Moser: Yeah.

Frankel: Especially the high-quality one. If I buy a 10-year treasury, I'm not going to get that much income out of it.

Moser: [laughs] No.

Frankel: I think they are just over one percent right now on 10-year treasury. It's better than it was. But it's more of a question of how much preserving your capital is a priority. If you can afford to survive the ups and downs of a market, let's say you're in your 30s like I am, and you have a few decades left for retirement, you can watch your portfolio go up and down. Not only you have a diverse collection of good businesses in there. You can have much less in bonds than you would say if bonds were yielding four or five percent. I know if bonds were yielding what they were in the '90s, I would have a whole lot more of them in my portfolio than I do right now. [laughs] I think you would agree with that statement.

Moser: I would. Yeah, absolutely.

Frankel: So it's a question of but. Then again, in your 60s right now, if you're almost at the finish line of retirement, your priority is preserving capital, bonds definitely still have in place. You're not going to get that type of capital preservation in the stock market, you're just not, even if you're buying like blue-chip dividend stocks. Think of the most boring rock-solid company you can. Jason, any names come to mind?

Moser: Procter & Gamble (NYSE: PG).

Frankel: There you go. Look what they did in March of 2020. It did not preserve the investors capital to have money in Procter & Gamble in March of 2020.

Moser: No.

Frankel: If it's a question of capital preservation more than anything, if you have money that you need, fixed income or bonds still has a great place in your portfolio. People younger, a lot of them are going pretty much almost 100 percent stocks right now. If you're in your 30s and 40s, I really can't argue with that if you're doing it a diverse correct way.

Moser: Yeah. You need to take into consideration things like if you're a homeowner, the equity that you have in your home. There are other types of investments that can be a little bit more protected. I like how you talk about the, are you in the grow your wealth state, or the protector wealth state. If you get that really does dictate a lot. I will say, I reached into some of our resources here at the Fool and just looking at some of the advice and rule your retirement, and the team over there, and this is just a round about way of looking at it. There is context and whatnot to be considered here. But generally speaking, they're looking at this from the perspective, more than 10 years out from retirement, maybe you have six percent of your portfolio in bonds. If you're within 10-years of retirement, maybe you have about 20 percent of your portfolio and bonds. If you're in retirement, maybe you have closer to 25 percent of your portfolio and bonds. Again, that's suggested guidance that doesn't take into consideration where all of your money is allocated. Again, if you have gold or real estate, or anything else, just things to keep in mind. But certainly, it feels like the closer you get to retirement, obviously, the more a role they potentially should play.

Frankel: Yeah, I would agree with that. They do have a position in your portfolio but not as the income generators that they once were.

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