Why to Invest in Bonds and Where to Buy Them

Bonds are one of the most misunderstood yet essential asset classes in investing. Nearly every investor, at some point, seeks both income and stability, typically as they get closer to retirement. Bonds not only provide income but also bring balance to a portfolio. When building a well-rounded portfolio, it’s not enough to just consider a mix of stocks across different sectors; bond exposure is almost always necessary.

In the past, before the rise of online investment platforms, investors would buy bonds for the income they provided and rarely worried about the fluctuations in the bond market. Bonds were viewed as a way to secure future income while stabilizing the equity portion of a portfolio. Traditionally, the larger the bond portfolio, the more reliable the income.

However, in recent years, many investors have lost interest in building bond portfolios, largely due to the proliferation of bond funds offered by retail investment firms. These funds often come with hidden costs, low yields, and high advisor fees. The low net returns from these funds, primarily caused by the inclusion of low-yielding bonds, have given bonds a bad reputation. But it’s important to note that the poor performance of bond funds doesn’t reflect the true potential of a well-constructed private bond portfolio.

So why should anyone focus on building a private bond portfolio?

1. Creating Cash Flow in Retirement

Building a private bond portfolio over time can generate consistent cash flow, especially during retirement. Those without a bond portfolio, who rely solely on equity growth, may face difficulties when markets are down or during recessions. A larger bond portfolio allows you to leave your equities untouched during downturns, enabling them the ability to recover when markets improve.

2. Diversification Benefits

Bonds offer diversification that often works inversely to the stock market. When stocks are down, bonds often rise or, at the very least, hold their value. This complementary relationship between stocks and bonds has proven to enhance portfolio performance over time. Historical examples show several periods where stocks dropped, but bonds remained stable or appreciated in value.

3. Down Market Opportunities

Owning bonds directly provides a significant advantage during down markets. The fixed income or yield from bonds continues to flow in, even when the bond prices drop. This is similar to how dividend-paying stocks work. When stock prices fall, the dividends remain the same, creating an opportunity to reinvest at lower prices. Similarly, during bond market downturns, the income generated from bonds allows investors to purchase more bonds at attractive prices, increasing future income potential.

4. Reducing Portfolio Worry

A portfolio balanced between stocks and bonds serves two primary purposes: meeting the long-term growth need through equities and providing stability and income through bonds. This approach reduces the need to chase returns or react to market trends. A balanced portfolio allows you the ability to stay the course and focus on your long-term goals without feeling pressured to pursue the latest promising investment. A well-diversified approach is often the most rewarding in the long run.

Where to Start

As a client of Linden Thomas & Co., our fixed-income team builds private bond portfolios based on three core principles: spreading risk between holdings, direct bond ownership, and maximizing net cash flow. With over 30 years of experience navigating all types of market conditions, our founder has seen firsthand how bonds can play a critical role in enhancing long-term investment results.
By carefully selecting bonds and managing risk, we help your portfolio provide the income and security you need, no matter what the market throws your way.