Bond returns tend to move up and down to a much lesser degree than stocks. For that reason, they’re commonly used by investors to reduce the overall volatility of a portfolio. Historically, though, bonds have also played another role in retirement portfolios, as both a source of income and return. But with current bond yields at record lows today, can bonds deliver the returns retirees need to ensure their money lasts for as long as they need it?
Should investors expect the same rate of return in the future?
Since 1982, bonds have returned just 1.3% less than global stocks. Should investors expect that same rate of return going forward? Definitely not. Why? Because over that same time period, since 1980, bond yields have fallen from the mid-teens all the way to near zero. The current yield of the Bloomberg Barclays U.S. Aggregate Bond Index is 1.2% [Figure 1]. In other words, rates are so low today, they have little room left to fall. So what can investors reasonably expect from here?
Can bonds deliver what investors need?
Can the typical 60/40 or 70/30 bonds-to-stocks retirement portfolio still deliver the returns and income retirement investors need? One look at the closely correlated relationship between bond yields and forward 5-year annualized returns suggests they can’t. Because historically, as bond yields have fallen, so too have average 5-year forward returns [Figure 1]. If this relationship holds, with yields as low as they are today, investors should expect bond returns to be low too, for the next 5 years at least.
The implication? Investors who’ve typically relied on bonds as a source of return, nevermind income, may want to consider taking a more tactical approach to fixed income investing, expanding their opportunity set beyond core bonds to riskier fixed income assets. Or, they may want to consider swapping some traditional fixed income allocations for equities with defensive characteristics.
To learn more about Horizon Investments’ retirement income solutions, explore our Distribution Strategies.
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