This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Bonds' Bad Returns Throw Savings Master Plans Out of Whack

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

NEW YORK ( TheStreet) -- It's one of the basic rules of investing: Divide your portfolio carefully between stocks, bonds and cash to find an ideal mix of risks and returns. But now, one part of that equation -- bonds -- is throwing the master plan out of whack.

The reason: Bonds now offer far more risk, and the prospect of lower returns, than at any time during the past three decades. Because of that, many investors may be wise to shift part of their bond holdings, perhaps a big part, into simple bank savings or other cash holdings. You won't make much money that way, but you'll protect your holdings from losses.

"The last 30 years you haven't had to make a choice in fixed income. It's given you great returns over and above inflation and low volatility. Now every dollar that goes into fixed income comes at a price of really reducing the expected return of the portfolio," says Michael Jones, chief investment officer and chairman of the RiverFront Investment Group, in a video interview with market-data firm Morningstar (MORN - Get Report).

While many investors expect bonds to produce lower returns than stocks, they also assume bonds are safer. Ideally, they also march to a different drummer, producing positive returns when stocks are in the dumps. That reduces the portfolio's overall volatility, or risk.

But over the past three decades bonds have produced stunning returns, even though their yields, or interest earnings, have generally been nothing to brag about -- especially in recent years. With yields low, the big returns came from rising bond prices. As prevailing interest rates gradually got lower and lower, investors were willing to pay extra for older bonds that were more generous than newer ones. This process produced stock-like returns for many bonds and bond funds.

But now rates are so low they cannot go much lower, with the 10-year U.S. Treasury, for example, yielding just 1.75%. Bonds with shorter terms yield even less.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
MORN $82.75 -1.45%
AAPL $95.18 1.64%
FB $117.43 -0.96%
GOOG $692.36 -0.84%
TSLA $232.32 -3.92%


Chart of I:DJI
DOW 17,750.91 -140.25 -0.78%
S&P 500 2,063.37 -18.06 -0.87%
NASDAQ 4,763.2240 -54.37 -1.13%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs