When things start to get alarming in the stock market, investors typically begin looking for relatively safe places to hide. Traditionally, their favorite hiding spot has been in the bond market.
Because bonds are less volatile than stocks, holding bonds during times of stock market decline has proven wise for investors in the past. During the Global Financial Crisis in 2008, for instance, when the S&P 500 surrendered 36%, an index tracking the broad bond market returned 9%.
The difference in performance isn’t always so stark, however. So far in 2022, that same bond index is struggling, having shed nearly 10%. That’s better than the 16% slide in the S&P 500, but it’s not exactly the safety blanket that investors are hoping for.
Just as with the stock market, things have been a bit weird for bonds lately. For one thing, the Federal Reserve has been hiking, and looks poised to continue to hike, interest rates. Because bond prices and interest rates move in opposite directions, many bond investments stand to erode as rates keep ticking up.
But wait, you may be thinking, don’t rising rates mean new bonds will pay more in interest? Yes, but rates are rising from absolute rock bottom. That same broad bond market index offers a yield of 2.6%. Compare that with the 8.3% inflation reading from April.
Even with these challenges, certain areas of the bond market can help shield your portfolio against swings in the stock market and protect your savings from inflation, says Eric Jacobson, a fixed income strategist at Morningstar. “A bond portfolio can act as a ballast against risks you’re taking elsewhere because it’s going to be less volatile,” he says.
I bonds: ‘The first place to start’
Many investors turn to bonds as a place to store money they’re hoping to use for a short- to medium-term goal, such as the down payment on a home. Bonds, the thinking goes, are less likely than stocks to incur a large loss, and the interest they pay will help you keep up with inflation more than if you just kept the money in cash.
If you have a trove of money you want to use this way, U.S. Treasury Series I bonds (or just I bonds) currently represent a good option to research first, says Eric Jacobson, a fixed income strategist for Morningstar. “The first place to start is with I bonds,” he told Grow. “They don’t come with price volatility and you know exactly what you’re getting if you turn them in early or hold onto them for longer.”
These inflation-adjusted bonds pay a fixed interest rate throughout the life of the bond, plus …….
Source: https://grow.acorns.com/bond-investments-that-act-as-a-ballast-against-stock-market-shakiness/
