The Role of Bonds in a Growth Portfolio
While bonds used to be generally regarded as defensive, lower growth investments compared to stocks, they have increasingly played a pivotal role in growth portfolios given the generally higher central bank policy rates globally. Bonds provide income, diversification, and capital appreciation potential.
The Power of Bonds
Bonds are widely regarded as defensive, income-generating investments that have typically delivered lower returns than stocks. However, this doesn’t mean bonds can’t be used successfully in a growth portfolio, especially after the recent rise in bond yields across many markets globally.
Take for example an investor in the early accumulation phase who is focused on building her wealth. She has a sizeable allocation to assets like equities to achieve her growth objectives but she also wants to reduce the volatility of her portfolio and, ultimately, limit the chances of negative returns.
An investment in bonds could provide the potential for stability she desires without a significant reduction in growth through diversification, a risk management strategy that mixes a wide variety of investments within a portfolio to help yield higher returns and/or lower overall risk.
For example, in the 20-year period from 2003 to 2023, a portfolio of 100% U.S. equitiesFootnote1 would have delivered an average annual return of 7.55% with volatility of 14.86%.Footnote2
If however, the portfolio was diversified with a 40% allocation to U.S. bonds,Footnote3 the volatility would have reduced to 9.42%.Footnote4 Critically, similar levels of growth would have been achieved with an average annual return of 6.05% – only 1.50% less than a 100% equities portfolio.
Scenario 1: 100% EQUITIES and Scenario 2: EQUITIES + BONDS. The pie chart on the left shows a 100% U.S. equities portfolio with an average return of 7.55% and volatility of 14.86%. The pie chart on the right shows a portfolio consisting of 40% U.S. bonds and 60% U.S. equities with an average return of 6.05% and volatility of 9.42%.
Data is for the period from 2003 to 2023, as of 31 December 2023. For illustrative purposes only. Equities represented by S&P 500 Index; Bonds represented by the Bloomberg U.S. Aggregate Bond Index. Volatility is measured by annualized standard deviation of returns. It is not possible to invest directly in an unmanaged index. Results shown do not represent past, or predict future performance of any specific PIMCO product or strategy.
2 Volatility is measured by annualized standard deviation.Return to content
3 U.S. bonds represented by the Bloomberg U.S. Aggregate Bond Index.Return to content
4 Volatility is measured by annualized standard deviation.Return to content
Disclosures
Unless stated otherwise, information contained herein is as of 31 December 2023. The information may be stale and should not be relied upon.
Past performance is not a guarantee or a reliable indicator of future results.
All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Equities may decline in value due to both real and perceived general market, economic and industry conditions.
There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. No representation is being made that any account, investment product, or strategy will or is likely to achieve profits, losses, or results similar to those shown. Investors should consult their investment professional prior to making an investment decision.
PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America LLC in the United States and throughout the world.
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