“What’s the point of these Bond funds?” is a fairly common question from clients when looking at performance of their investments. Invariably what they mean is that they haven’t grown as much as other investments, such as the equity funds, and so surely they must be poor investments and need to be changed.
One oft quoted comment of Jack Bogle, US investor and founder of Vanguard, is that you should hold the same percentage in Bonds as your age. This stems from the view that the purpose of Bonds in a portfolio is one of diversification and volatility reduction.
Bonds, as a broad term covering a wide range of Government and Corporate issued debt, are in theory safer than equities. If issued by a Government, then their repayment is as certain as the financial strength of the Government; if issued by a company then they would rank before equity for payment from assets if a company went bust.
In addition, the reasons why Bonds go up and down are often not the same as for equities. They they will be more directly affected by things such as changes in interest rates than equities for example, as we saw when interest rates shot up when Liz Truss was Prime Minister. So this lack of correlation should mean (not always) that when equities go down, Bonds go up, and vice versa.
The “same as your age” argument takes this a little further and presumes that as you get older you need greater security and that therefore the more of your investments you should have in the theoretically safer, less volatile assets.
This view holds that investing is about growth and to get growth you should invest in “The Great Companies of The World” (“TGCoTW”). So there is no reason to include Bonds in your portfolio because inherently they should produce less growth than equities. Generally this is also accompanied by a view that you should invest in line with the size of each stockmarket, so the vast majority of your investment would be in the US, as the biggest market, and mainly in the biggest US shares such as Apple, Microsoft and Amazon.
This is not dissimilar from another oft quoted comment, from the famous investor Warren Buffet, that for most people the best thing would be to buy an S&P 500 index fund – so simply invest in the US stockmarket. In his case he was talking as much about the average investor not taking the risk of picking individual equities and hoping they picked the right ones, but it is often used as one of the arguments in favour of just investing in equity funds.
One of the key moments in my decision to get my Certified Financial Planner licence and Institute of Financial Planning Fellowship with a view to becoming a proper, fee-based, professional financial planner, was a presentation at an IFP conference about asset allocation. Both simple and complex, it asserted that the best way to invest to and then through retirement was to be 100% smaller companies and emerging markets equities up to retirement and then to transition into an equity/Bond mix through retirement. It was a great presentation and yet, having thought about it more, at the same time inherently flawed.
It is true that where we would expect to see growth it would be from equity funds and other sectors such as infrastructure and energy. So, for long term growth, which is surely what everyone wants, the obvious answer is to stick with equities.
However, one reason why there was so much noise about the average American and their 401K when Trump started his tariff war, was because US investors tend to hold lots of equities and tend to hold lots of US equities, if not exclusively US equities. Between mid-February and early April, around seven weeks, the S&P 500 index of US equities fell by almost 20% in US Dollar terms*.
Over the last 20 years that same Index has risen by over 160%, whilst Bonds have at best held steady and in the case of UK Government debt, fallen, proving the point about the place to be being equities if you are looking for growth. However, growth is not the only thing that needs to be considered.
If you had been invested in the S&P 500 index for 20 years and then cashed in for your retirement in early February, you would have been very happy. If you had been invested for 20 years and then cashed in for your retirement in mid-April, you wouldn’t have been quite so happy. If you had been invested for 20 years and retired from work and begun to draw on your investments at the beginning of 2025, come mid-April you would have been seriously concerned about whether your plans were going to work and you were going to have enough to last.
Meanwhile, those Bond funds stayed pretty much steady and, depending on the type of fund and what it was investing into, might even have gone up a bit.
When do you want to use this money and how are you going to use it. Are you going to be cashing it all in or using it over time? Is the date that you need to use it fixed or do you have the flexibility to be able to wait if things aren’t looking good? Do you need to use this money in the next couple of years or is this money that you won’t start to use for another 15 or 20 years?
This is where I felt that IFP presentation was flawed, is that it treated investment purely as a financial and mathematical exercise and ignored the fact that human beings are involved. One of the key elements to investing is gauging at what point your rational self, which accepts that investments fall as well as rise, will get mown down by your irrational self, unable to stomach the falls that they have seen, rushing for the exit.
If you had been a US investor with a 401k invested exclusively in the S&P 500, panicking and selling on 8th April would see you now looking at the US stockmarket and wondering why you did that, since it has recovered a lot of the loss and is only around 5% down since mid-February. However, watching your retirement fund drop and drop and drop over such a short period of time, with no idea where things were going or what might happen next, isn’t going to be easy.
So, the “point of these Bonds” is mostly to aim to keep a portfolio fluctuating within a band that you as an individual can tolerate. Using the fact that Bonds and equities are not directly correlated can mean that when equities fall off a cliff, the other part of your portfolio is there to cushion the impact. Yes, they can generate some useful income to put towards the end result, especially when you are drawing out of your investments rather than adding to them. However, they aren’t the bit that is going to give you the returns you are after, they’re the bit that is going to every once in a while make you think “I’m glad I’ve got those” – problem is, you never know when that’s going to be.
* Source FE Fundinfo 19/02/2025 – 08/04/2025
The value of investments and any income from them can fall as well as rise. You may not get back the full amount invested. Past performance is used as a guide only; it is no guarantee of future performance.
