Why more SMSF should have bonuses

Bonds have been a good investment for decades. The tide was destined to turn. It’s human nature when a particular asset class falls out of favor to blame itself (or its adviser!) for not seeing it coming. The truth is that timing the ups and downs of the markets is fiendishly difficult. It makes much more sense to maintain a well thought out strategic asset allocation that matches your risk-return position and simply ride out the inevitable periods of underperformance for individual asset classes.

A smoother ride

Bonds also play a critical role in dampening portfolio volatility, making for a smoother ride and more reliable returns. This is possible because in times of stress and uncertainty, when stocks tend to fall, bonds generally rise in value, offsetting losses in the stock portfolio. Bonds also offer liquidity, help preserve principal and, crucially, help protect against the impact of inflation, as bond yields include a built-in premium to inflation expectations.

So what should you expect from the bond markets? Bonds are priced similarly to stocks in terms of market expectations. Bond yields are set by the bond market that values ​​inflation, interest rates, employment, etc. expected. The recent underperformance of bond investing has been caused by the bond market repricing expectations about future inflation and interest rates. For example, 10-year bond yields have gone from 1% to around 3% both here in Australia and in the US as the market now expects interest rates to rise much faster than expected. previously anticipated. This is a big move in the bond world (considering that as yields go up, bond prices go down).

With expectations around future interest rates and long-term US bond yields both hovering around 3 percent, in effect, the bond market has completely priced in expectations about inflation and future interest rates. This does not necessarily mean that the market’s expectations about future interest rates are correct, but it does mean that yields are just as likely to go down as they are to go up.

Bonds have served investors very well over the years and will do so again in the future. If we are indeed headed for that hard landing that many are predicting, you’ll be glad you chose to keep your faith in them.

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