While bonds used to be generally regarded as defensive, lower growth investments compared to stocks, they have increasingly played a pivotal role in growth portfolios given the generally higher central bank policy rates globally. Bonds provide income, diversification, and capital appreciation potential.
The Power of Bonds
Bonds are widely regarded as defensive, income-generating investments that have typically delivered lower returns than stocks. However, this doesn’t mean bonds can’t be used successfully in a growth portfolio, especially after the recent rise in bond yields across many markets globally.
Take for example an investor in the early accumulation phase who is focused on building her wealth. She has a sizeable allocation to assets like equities to achieve her growth objectives but she also wants to reduce the volatility of her portfolio and, ultimately, limit the chances of negative returns.
An investment in bonds could provide the potential for stability she desires without a significant reduction in growth through diversification, a risk management strategy that mixes a wide variety of investments within a portfolio to help yield higher returns and/or lower overall risk.
For example, in the 20-year period from 2003 to 2023, a portfolio of 100% U.S. equitiesFootnote1 would have delivered an average annual return of 7.55% with volatility of 14.86%.Footnote2
If however, the portfolio was diversified with a 40% allocation to U.S. bonds,Footnote3 the volatility would have reduced to 9.42%.Footnote4 Critically, similar levels of growth would have been achieved with an average annual return of 6.05% – only 1.50% less than a 100% equities portfolio.
