Are Bonds a Good Investment?

A lot of investors are not 100% growth investors, meaning they need to have a balance of high risk growth funds, and low risk defensive funds.

The low risk defensive funds are almost entirely bonds, and the aim of bonds is to be more stable and grow more quietly while the growth funds are more volatile.

However, the hard thing to take in the last few years is that the apparently safe, low risk, low volatility funds have lost value. It’s easy to accept a loss in the growth stocks because it goes with the territory. “I’m prepared to lose at times in order to gain, but the bond funds are meant to be stable. They shouldn’t be going down while growth stocks are going up” This is how it feels as an investor. The recent experience in bond funds doesn’t feel good.

But the market always has a way of testing how much you deserve to achieve long term results. The market will tempt the undisciplined investor to do precisely the wrong thing at the wrong time.

Bond funds have lost value in the last few years because interest rates have gone up so much. When rates go up bonds lose value, and when rates go down bonds will gain in value.

The bond funds aren’t suddenly bad investments because interest rates have gone up. When bonds get less gains or losses in the last few years, we shouldn’t think about changing funds, we should think of it as the future gains are being stored up. When interest rates go down (it’s not if, it’s when!) we expect that bond funds will show strong performance. So as always with investing, if you are in a proven strategy, don’t react to newsflow or price movements. You will be rewarded for doing the things that others cannot.

This chart puts the recent bond losses into context.