In the aftermath of a challenging year for bonds in 2022 as interest rates rose, investors might be tempted to overlook the diversification benefits of bonds.
However, that could mean missing out on the historical resilience that bonds have shown in turbulent times. This can be seen by reviewing historical market data, especially during major market crises.
A great example is the performance of a balanced portfolio of 60% U.S. stocks and 40% aggregate bonds during significant downturns. During the 2008 financial crisis, this portfolio saw a decline of 32.6%. In the 2000 dot-com bubble, the drop was 22.4%, and during the March 2020 COVID-19 crash, it was 12.3%.
While these numbers might seem discouraging at first glance, the situation for anyone fully invested in equities was considerably worse. In those same periods, 100%-equity portfolios experienced drawdowns of 44.8%, 51% and 19.6%, respectively.
These three major market crises illustrate the stabilizing role that bonds can play in a diversified portfolio. They not only offer a counterbalance to equities in times of market stress but also provide a source of regular income and capital preservation.
This…
