Despite the tumultuous start to the stock market this year with massive declines in all three major indexes on Friday amid global fears of an economic slowdown, Generation X and Millennial investors should avoid adding bonds to their portfolios.
The markets took a nosedive dive with the Dow Jones Industrial Average dropping by 522 points on Friday at one point as it dipped below 16,000 and the S&P 500 index entering correction territory, falling more than 3% midday, wiping out the mini rally from the previous day. The Dow ended up at 15,988 with a 2.39% decline while the S&P 500 fell by 2.16% at 1,880. Though the Dow is up some 100 points this morning, investors are skittish and eager to make moves to safeguard their cash.
Yes, the steep declines this week could signify the beginning of a larger correction. Anticipation for a true rebound in the stock market has nearly evaporated as investors have continuously waged one massive selloff after another among deepening fears of a global downturn while crude oil tested new lows again.
But thought fearful investors often turn to investments that they deem to be safer, such as corporate bonds and Treasuries -- sacrificing yields for less volatility -- they need to resist this strategy. It's a fool’s errand, because in reality, bonds do not protect portfolios from “steep market declines,” said Matthew Tuttle, the portfolio manager of Tuttle Tactical Management U.S. Core ETF (TUTT).
Allocating more bonds than stocks in your portfolio may protect you from too much downside, but bonds do not rise as much as stocks will decline in a bear market, he said.
“This might offer some minimal protection, but it also protects you from making money in a bull market,” Tuttle said. “It also assumes that the 30-year bull market we have had in bonds will continue, which is mathematically impossible.”
Bonds do not need to be a “significant part” of a retirement portfolio, since “every bond is susceptible to default,” said Patrick Morris, CEO of New York-based HAGIN Investment Management.
Why Junk Bonds Are Not the Answer Either
With little upside to owning corporate bonds, some investors turn to distressed high yield bonds known as junk bonds. The main issue with owning them is that “it is a ton of work,” Morris said.
“Greek bonds, Argentina bonds and energy company debt are all great investments if you have the resources to really do in-depth research,” he added.
Ratings agencies are not always independent analysts of the bonds, so even if the bond receives an investment grade rating, the “event of a default can be hard to predict,” Morris said.