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Why Own Bonds When Rates Are Low And Inflation Is High?

Updated: Sep 1, 2021

RL079 - Why own bonds when rates are low and inflation is high?

Today on the Retirement Lifestyle Show Erik Olson and Adrian Nicholson analyze bonds in a negative real interest rate environment. They talk about the pros and cons of having bonds in your portfolio, the long-term debt cycle, and hedge fund replication strategies.

[03:30] Do you Still Need Bonds in your Portfolio?

[07:15] Bonds and Negative Yields

[12:45] The Central Bank’s Plan for Economic Stimulus

[16:50] The Long-Term Debt Cycle

[18:50] Investing in Bonds Outside the US

[24:53] What is an Extremely Diversified Portfolio?

[30:50] Dissecting North Trust’s Argument on Bond Yields

[35:10] Long-Term Bonds and the Duration Risk in your Portfolio

[47:50] How to Seek Higher Yields in Bonds

[53:55] Hedge Fund Replication Strategies

[56:20] Building a Diversified Bond Portfolio

Links and Resources:

For more links and the full show notes keep scrolling down!

Roshan Loungani can be reached at or at 202-536-4468.

Erik Olson can be reached at or 815-940-4652.

Adrian Nicholson can be reached at or at 703-915-8905.

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Full Show Notes:

Do you Still Need Bonds in your Portfolio?

For the longest time, bonds have played a crucial role in most people’s capital preservation and investment options. Their history of offering stability and income to a portfolio, particularly for retirees, made it possible for people to fund the bulk of their future income streams. However, the past couple of decades have seen bonds lose their profitability and attractiveness in the eyes of most investors.

The US Treasury’s 10-year yield currently stands at 1.24%, while several other government bonds across Europe can only manage negative rates. The matter is further worsened by the fact that the core inflation currently stands at 4.3%. Therefore, if your bonds yield 1.24% and inflation is at 4.3%, then your investment is practically at a negative 3.06% return. So, the question is, does it still make sense to hold bonds in your portfolio?

Investing in Bonds Outside the US

As earlier mentioned, bonds have, for the past couple of years, been yielding nominal rates. Yet, interestingly, some people still want to invest in bonds as a means of diversification. If you’re still interested in investing in bonds, several ways can help boost better outcomes. And that involves doing something that can feel like dangerous living: investing in international bonds. One great example of this is investing in the Chinese bond. China boasts a favorable balance of trade and higher yields than the US. Nevertheless, before you go rushing to get a piece of the Chinese cake, you need to understand several risk factors involved—for example, political risks and currency fluctuations.

All in all, there is some value to be gained in international bonds since the factors that drive international prices are often uncorrelated to those that affect the US. Plus, the higher yields and favorable economic balance of payments are far too lucrative compared to the risk involved.

An Extremely Diversified Portfolio

Most people understand what portfolio diversification is, yet most investors don’t know how to diversify. For example, the less informed investor sees diversification as investing in different companies in unrelated fields. And the more stubborn investor will not invest in anything outside the big names such as Amazon, Microsoft, and Google. These companies compound capital the fastest, and so, to them, it makes sense to position most of your wealth in them.

Although the overall aim of investing is growing wealth, the best investment strategies involve both growth and preservation. According to Ray Dalio, the best diversification strategies involve investing in US equities, international equities, and tangible assets such as real estate, gold, and cryptocurrencies. Therefore, instead of adding more shares from the big industry names, get yourself some real estate or gold and just essentially minimize the risk in your portfolio.

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All opinions expressed by podcast hosts and guests are solely their own. While based on information that they believe is reliable, neither Arete Wealth nor its affiliates warrant its completeness or accuracy, nor do their opinions reflect the opinion of Arete Wealth. This podcast is for general informational purposes only, and should not be regarded as specific advice or recommendations for any individual. Before making any decisions, consult a professional.

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