Buffet & Bonds – You Have to Do What’s Best For You!

Buffet & Bonds

You still need some bonds in your portfolio!

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Recently Warren Buffet said that he would not own any bonds in his portfolio. However, individual investors don’t have the emotional fortitude to exclude bonds in their portfolio. Bonds serve as a “shock absorber” to a portfolio – offsetting the inherent price volatility of stocks. The past 35 years bonds have been a safe haven with big upside as rates have dropped from 10%+ to 1-2%. Now that the tide is turning and rates may tick up a bit (1%+ – your guess) bonds will see some loss in value. BUT bonds still hold a place in individual portfolios.

So what to do? Shorten the duration of the bonds (or bond funds) to control the bond risk – assuming your overall bond duration is 5 years you only lose 5% of the value if interest rates tick up 1%. Alternatively, hold individual bonds until maturity and lose no market value. You will still experience price volatility but much less than holding 100% stocks. Your stock/bond mix should allow you to sleep well at night and not worry about your portfolio. None of us have the $billions that Buffet has and we need to protect what we have. We can learn much from his writings but we should not read too much into any one comment he makes. The right balance of bonds in your portfolio still makes sense.

Ray Giese

I help my clients align their purpose, their passions, and their paycheck to achieve financial freedom while realizing greater professional and personal satisfaction from their careers.

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