Currently, the stock market is at an all-time high. Of course, we’ve all seen that can change in the span of a short trading day. That is the reason any financial advisor hesitates to advise folks with long-term investment goals to focus only on stocks.
Typically, at Isakov Planning Group, we preach an approach that mixes stocks and bonds. Why bonds? We’re not talking about high-risk junk bonds. There are so many reasons to invest in quality corporate, municipal, and federal government bonds and bond mutual funds.
First, bonds help investors reduce risk and increase stability. As the stock market fluctuated over the course of the last 25 years, bonds, while slower growing, did not generally suffer the dips in value in market corrections that other equities experienced. In fact, depending on the economic conditions, bonds and stocks often move in opposite directions: During a downturn in the stock market, the value of bond investments may actually increase.
For example, say you invested $10,000 in a 60/40 mix of stocks and bonds in 2000 vs. all stocks. That diversified portfolio would be worth only a few thousand less in 2025 than if that money had been spent on stocks alone, but without the same drops in value during market downturns over this long period. On the other hand, if you invested that money only in bonds, the 2025 value would have grown far more slowly, but without almost any volatility of the all-stock or even the mixed portfolio.
A second reason why bonds are attractive is that most pay interest, providing a regular income stream. Those interest payments, as well as their ability to preserve capital (especially US Treasuries or high-quality municipal and corporate bonds), may make relatively safe havens in tough economic periods.
Variety in the types of bonds available comprises a third reason for investing in bonds. Certain bonds, especially short-term bonds, can be very useful when inflation rises or interest rates fall. The availability of different kinds of bonds can help investors adjust their bond allocation for different market conditions or changes in your own tolerance for risk.
If you have questions about adding bonds to your 401k, IRA, and brokerage investment accounts, give us a call at Isakov Planning Group. We have the expertise in bond investing you need to decide what types of bonds and what mix is right for you.