The financial media has been screaming about a bond bubble or Bondageddon. This hysteria is leading people to question why they hold bonds since interest rates “must” go up and bond prices “must” go down.
This week week we look at an article discussing research by Dimensional regarding how bonds have performed during recent periods of interest rate increases. Dave Plecha, Senior Portfolio Manager at Dimensional noted that “In three out of the four periods studied, bonds delivered positive returns-pointing to the diversifying role that they can play in a portfolio.”
When thinking about bonds keep a couple of things in mind. First, there is no evidence that “bond gurus” can consistently forecast interest rate movements with accuracy. Second, even if interest rates do go up bond prices don’t always decline.
We believe bonds play an important role in most portfolios-that is bonds typically provide stability at times when stock prices decline. Investors who build a well thought out, diversified portfolio are wise to ignore the conventional “wisdom” of the media and assorted gurus.