Re: Bond funds - very basic question
Posted: January 23rd, 2024, 12:09 pm
GeoffF100 wrote:You also make money from bonds when interest rates remain broadly the same. If equities crash, there is usually a "flight to safety" and bond prices rise as a result. That is the main reason why many people hold bonds in addition to equities. More often that not, the bonds rise when equities take a serious fall. Even if that does not happen, bonds dilute you losses when equities take a serious fall.
I have never understood bonds, one of the reasons I've never put much in them. However I have heard several times that "flight to safety" idea. And the idea which flows from it: that, since bonds and equities are meant to go in "countervailing" directions, bonds would help deliver improved stability, i.e. less volatility, in a portfolio.
But I remember looking at bond performance graphs in mid-2020. Firstly I looked at what happened in mid-March of that year, when equities plummetted to unseen depths, before recovering equally spectacularly, because it was the start of the pandemic. So did bonds (NB when I say "bonds" I don't mean ultra-short bonds, or even 2-year bonds, which might well have been more resilient: primarily I mean "funds involving bonds", which I believe usually means funds involving "laddering", i.e. an assortment of terms). The bond dip was more muted, but it wasn't countervailing.
So I started looking at previous periods when equities had gone down. A totally amateurish approach. But I could never see (just with the naked eye) much evidence of any countervailing effects.
I'm not saying this does not exist: but some serious number-crunching would have to be done to convince me that this "countervailing trend" of bonds isn't just an urban myth. Personally I now feel that bonds (except for ultra-shorts, or unless you're planning to hold them to term) should not be held by retail investors since they are too vulnerable to the capricious decisions of central bankers.