Do Bonds Have a Role to Play in Your Portfolio in 2024? (2024)

FAQs

Are bonds still a good investment in 2024? ›

Investment advisers say now is a fine time for bonds. They are a good investment in 2024, experts say, for the same reasons they felt like a bad investment in 2022. That year, the Federal Reserve embarked on a dramatic campaign of interest-rate hikes in response to inflation, which reached a 40-year high.

Bonds play an important role in your total portfolio as both a key source of stability, or ballast, as well as a source of income compared with stocks. But like stocks, it's important to make sure bonds are appropriately diversified to reduce risk.

Traditionally, the answer has been that bonds provide diversification and income. They zig when stocks zag, providing income for spending needs. In finance terms, bonds have “low correlation” levels to stocks, and adding them to a portfolio would help to reduce the overall portfolio risk.

Bonds are considered a defensive asset class because they are typically less volatile than some other asset classes such as stocks. Many investors include bonds in their portfolio as a source of diversification to help reduce volatility and overall portfolio risk.

The 4.28% composite rate for I bonds issued from May 2024 through October 2024 applies for the first six months after the issue date. The composite rate combines a 1.30% fixed rate of return with the 2.96% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U).

If you sell your bonds as soon as someone hints at the word "hike," you may be jumping the gun. When the market consensus is that a rate increase is right around the corner, it's time to sell and reinvest the proceeds in higher-paying bonds. One caveat applies to short-term holdings or those that are near maturity.

We suggest investors consider high-quality, intermediate- or long-term bond investments rather than sitting in cash or other short-term bond investments. With the Fed likely to cut rates soon, we don't want investors caught off guard when the yields on short-term investments likely decline as well.

The 90/10 rule in investing is a comment made by Warren Buffett regarding asset allocation. The rule stipulates investing 90% of one's investment capital toward low-cost stock-based index funds and the remainder 10% to short-term government bonds.

Stock investors also often turn to high-yield corporate bonds to fill out their portfolios as well. This is because such bonds are less vulnerable to fluctuations in interest rates, so they diversify, reduce the overall risk, and increase the stability of such high-yield investment portfolios.

Ultimately, holding bonds in a portfolio can help with diversification. Often, portfolio solutions (investments made up of carefully selected and managed mutual funds and/or exchange-traded funds) will include a fixed income component depending on how much risk you're comfortable with or when you will need your money.

When should I start adding bonds to my portfolio? ›

With more than a decade or two of working years left until retirement, it's important to maintain the growth potential of your portfolio through an appropriate allocation to stocks. In your 50s, you may want to consider adding a meaningful allocation to bonds.

A right choice for you may depend on the amount of money you have to invest, your ability and interest in researching investments, your willingness to track them on an ongoing basis, and your tolerance for different types of risk. In some cases, it may make sense to combine individual bonds with bond mutual funds.

We suggest most investors first focus on "core" bonds, or high-quality bonds, like U.S. Treasuries, certificates of deposit, mortgage-backed securities, investment-grade corporate and municipal bonds, as well as Treasury Inflation-Protected Securities.

Over the long term, stocks do better. Since 1926, large stocks have returned an average of 10 % per year; long-term government bonds have returned between 5% and 6%, according to investment researcher Morningstar.

We believe lower yields and duration gains will be the most significant source of returns for local currency bonds in 2024. We believe lower yields and duration gains will be the most significant source of returns for local currency bonds in 2024. That said, there's also scope for EM foreign exchange appreciation.

As for fixed income, we expect a strong bounce-back year to play out over the course of 2024. When bond yields are high, the income earned is often enough to offset most price fluctuations. In fact, for the 10-year Treasury to deliver a negative return in 2024, the yield would have to rise to 5.3 percent.

Bond market strategists and fund managers generally agree that yields are still attractive, especially relative to inflation, and will likely stay higher than before the pandemic.

Key takeaways. Global core inflation is expected to remain at close to 3% in 2024, limiting the scope for policy easing. In U.S. equities, momentum crowding and stock market concentration are now at multi-decade extremes.