- Downside Protection
- Steady Returns
- Diversification Benefits – Negative correlation to stocks
Fixed income benefits portfolios most when volatility strikes in financial markets. When risk assets (stocks) experience sell-offs, bonds have historically held their value and provided valuable downside protection. This dynamic has historically occurred as investors sell stocks because of perceived risks and shift capital to the safer choice of bonds, boosting their returns in times of crisis. The past three major stock market declines show just how important it has been to have some fixed income in a portfolio.
In the past three major stock market declines of the past 25 years, fixed income (Barclays US Agg) has proven to be very resilient, notching consistent gains.
Fixed income has historically produced a very steady, low volatility return stream. The combination of income and price appreciation has produced strong annual returns over the past several decades, with very few negative returning years.
Drawdowns, an important analysis of any investment, have been a small fraction of the drawdowns experienced in the stock market. This further highlights the importance of the fixed income asset class as a strong investment option in and of itself, as well as a counterbalance to equity exposure within a portfolio. While stocks tend to experience 10-15% drawdowns fairly frequently, and even greater declines about once a decade, fixed income rarely declines more than 5% before rebounding quickly.
We are always told how important diversification is in creating a portfolio. Investors often think of creating a diversified portfolio of stocks; however, true diversification comes into a portfolio via fixed income. The table below from the Yale University Endowment shows correlations across asset classes – and nothing comes close to fixed income’s diversification benefits. In times of crisis, most correlations go to 1. It is in these times that fixed income assets provide immense value.
Fixed income has always been an overlooked and critically important component of portfolio construction. Throughout history, there has not been another asset class that has provided as reliable diversification benefits and downside protection alongside such strong and consistent returns.
The role of fixed income in investment portfolios is as relevant today as ever. Lower starting yields have made the task of investing in fixed income more complicated and increased the need for strong fund and security selection – two things we specialize in at Athos Capital Advisors.
Contact us today to learn more about how we can help you reach your long term wealth goals.
Henry A. Miketa
Athos Capital Advisors