Now is the time for short and intermediate-term bond investments for those clients who want to create a balanced portfolio, said Brian Walker, wealth advisor at Bartlett Wealth Management.
Because of the continuing inflation that is putting pressure on the U.S. and global economies, long-term bonds do not show much promise for returns, Walker, who serves on the strategic asset allocation committee at the firm, said in an interview. The Consumer Price Index rose 7% in December.
“None of our clients are in long-term bonds,” said Walker, who added that advisors need to consider each client’s needs. But he held out little hope for long-term bonds as a stabilizing force for portfolios. Bartlett Wealth Management, which was established more than a century ago, is based in Cincinnati and has offices in Chicago. Walker focuses on the fixed income market for the firm, which serves families, professionals and some institutional clients.
Despite persistent low interest rates, bonds can serve a purpose, by dampening volatility of the portfolio and providing predictable returns. Each client should consider his or her goals and determine how much of the portfolio should be devoted to fixed income, he added.
“Clients have been asking about bond investments,” Walker said. ”Interest rates have been so low for so long” that they want to know how to get returns. “We tell them they are not going to get compensated for owning long-term bonds.”
“Core fixed-income investments should be in high quality corporate bonds with durations of six to seven years or less,” he added, because government bonds are paying very small returns.
Bonds play a few different roles in a portfolio, Bartlett Wealth Management said in a statement. In addition to dampening volatility, bonds can fund investors’ long term spending requirements. Investors should strive to have three to five years’ worth of those expenses in bonds and other safe investments so that when there is turbulence in the stock markets, they do not have to sell stocks at depressed prices.
Treasury Inflation-Protected Security (TIPS) also are a good bet, Walker said. TIPS are Treasury bonds that are indexed to an inflationary gauge to protect investors from the decline in the purchasing power of their money. The principal value of TIPS rises as inflation rises while the interest payment varies with the adjusted principal value of the bond.