Broker Check

Is Diversification Dead?

May 05, 2022
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Our last newsletter included this line regarding bond returns: “The first quarter of 2022 was the worst quarter for U.S. Bonds in the last 40 years.” Indeed, these are unique times. As of the end of April, the year-to-date return on 10-Year Treasury bonds was (11.3%), U.S. Bonds were (9.5%) and Global Bonds were (11.3%).1  
First Quarter, 2022, saw many bonds with greater losses than stocks. However, this is very rare. Since 1976 there have been 50 quarters where stocks had a negative return. During the same timeframe, bonds outperformed stocks 47 of the 50 quarters.
We incorporate bonds into portfolios to act as a “seatbelt” when markets are volatile. They also serve to provide consistent income. Given that backdrop should we discard bonds in our portfolios? We don’t think so. While diversification did not work last quarter, we believe bonds still serve a vital role in portfolios.
 
One final consideration: bonds are simply a loan to an entity – typically a government or corporation. The single biggest risk to bonds is default (a fancy way of saying the bond is not paid back.) As we wrote earlier, corporations continue to exceed expectations for earnings and revenue and they have very strong balance. We see the likelihood of mass defaults very low. We may see some continued volatility as the Fed continues to raise interest rates but we also believe this volatility has created some opportunity in the bond markets. 
1Sources: MacroBond Financial AB, Morningstar Inc., Bloomberg LP. 10-Year Treasury is represented by the Bloomberg Barclays 10-Year US Treasury Bellwethers Index , US Bonds are represented by the Bloomberg Barclays US Aggregate Index and Global Bonds are represented by the Bloomberg Barclays Global Aggregate Index

The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts or Lincoln Investment. The material presented is provided for informational purposes only. Past performance is no guarantee of future results. All investing involves risk and no investment strategy can guarantee a profit or protect against loss, including the potential loss of principal. The Bloomberg US Aggregate Bond Index is a broad-based benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The Bloomberg Global Aggregate Bond Index measures the performance of the global investment-grade, fixed-rate bond markets.The bond market is volatile and carries interest rate, inflation, liquidity and call risks.  As interest rates rise, bond prices usually fall, and vice versa.  Change in credit quality of the issuer may lead to default or lower security prices.  Any bond sold or redeemed prior to maturity may be subject to loss. Diversification does not guarantee a profit or protect against a loss.