Investors have been moving out of fixed income and pundits have been talking about how it is no longer a “safe” investment. Stocks and cash have been offered up as safer investments. However, recent world events have given a prime example of why it’s important to continue to maintain an allocation to fixed income.
Over the August weekend of the 24th it became clear that the White House and Pentagon were firmly in favor of taking action against Syria in response to their alleged use of chemical weapons. Iran, China, and Russia have all voiced opposition to making a move for various reasons and Russia has blocked U.N. Security Counsel Resolutions against Syria over the past two years. The aggressive stance by the U.S. shook stock markets as the potential fallout would be unknown. The stock market hates uncertainty.
Beginning on Monday the 26th U.S. stocks sank over the concerns on how long an engagement could last and what the reaction from other nations could be. From August 26th through the end of the month US stocks fell 1.84%. However, over the same time period the broad bond market rose 0.21%.
While bonds have fallen in 2013 given the rise in interest rates and could fall further if interest rates continue to rise, they still serve a valuable purpose within an investment portfolio. They provide stability with minimal price swings and provide a counter balance to equities. When there is surprise negative news for the U.S. economy or the global economy it sends investors to safe haven investments. Bonds, and U.S. government bonds specifically, are still considered one of the safest if not the safest investment in the world. Cash, while a safer investment than fixed income, provides no income and an investor would need to know precisely when to sell their bonds and precisely when to buy them back. Such efforts to time the markets consistently cost investors through transaction costs and lost yield. By continuing to maintain an allocation to bonds, and government bonds in particular, it provides an investor with the safety and stability that should be part of a well diversified portfolio.
Index Performance Aug. YTD Trailing 1 Yr
US Stock (Russell 3000) -2.79% 16.95% 20.32%
Foreign Stock (FTSE AW ex US) -1.35% 3.15% 13.62%
Total US Bond Mkt. (BarCap Aggregate) -0.51% -2.81% -2.47%
Short US Gov. Bonds (BarCap Gov 1-5 Yr) -0.27% -0.54% -0.47%
Municipal Bonds (BarCap 1-10yr Muni) -0.70% -1.92% -1.14%
Cash (ML 3Month T-Bill) 0.00% 0.05% 0.11%
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