The threat that bond investments could lose value if interest rates rise doesn’t make the case for owning an all-stock portfolio—even in today’s market, according to Fidelity’s Jeff Moore, who thinks it’s a mistake to overlook the traditional role bonds serve in diminishing equity volatility and diversifying stock risk.
”I believe it is always important to think about diversifying and finding some balance,” notes Moore, portfolio co-manager of Fidelity® Investment Grade Bond Fund (FBNDX).
Consider a $100 portfolio: If you invest only in stocks with typical market volatility of about 20% a year, Moore says you should expect a two-thirds probability of finishing the year with $80 to $120.
Now, picture investing that same $100 in the investment-grade bond market. With average historical volatility around 3%, you’d have a two-thirds chance of ending the year with between $97 and $103 in principal, according to Moore. Then, add back 2% in interest earned, and you can expect to finish with anywhere from $99 to $105, he says.
Therefore, in most scenarios, he says bonds have tended to offer a degree of protection against portfolio drawdowns compared with owning just stocks, with the potential of more-predictable income generation.
Moore adds that he attempts to beat the return of the overall bond market by finding the best relative values for the fund, including corporate bonds, securities with higher-than-average coupons (stated interest rates), and select BB-rated debt.
He and fellow manager Michael Plage try to capture only a little outperformance when market conditions are relatively stable, then take on more risk when they see lots of value.
It’s rare for bonds to lose value, Moore adds. Looking back over time, the investment-grade bond market, as measured by the Bloomberg U.S. Aggregate Bond Index, declined in just three of the past 45 calendar years since 1976—compared with 10 years of negative performance for the U.S. equity bellwether S&P 500® over the same span.
“I like the resilience, lower volatility, and income-generating potential that investment-grade bonds can provide, and believe, when held in prudent proportions, they can offer increased safety and peace of mind, especially compared with just owning stocks,” he says.
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