Bad Year for Bonds in 2022
February 3, 2023
There are a few fundamental guidelines we recommend people use when developing their investment portfolio, writes Peter Watson.
It starts with diversification: a combination of stocks and bonds.
Stocks usually have a higher expected rate of return that can help your portfolio grow. Bonds usually have a lower expected rate of return, but they provide stability and downside protection.
As a bonus, we assume the investment performance of these two asset classes will not be highly correlated. When stocks perform poorly, we rely on bonds to at least hold their value if not provide a small return.
Unlike stocks, when bonds decline in value, we expect that the decline will be modest. That has historically been the case.
This was not true last year. Canadian and Global bonds both declined 11 per cent, according to Bloomberg.
The bond loss of value was still better than US stocks as measured by the S&P 500. That index lost 18.1 per cent for the year. This was the worst decline since the financial meltdown of 2008.
The 11 per cent decline with bonds is much more surprising than the 18 per cent decline with the stocks. You expect stocks to decline in value from time to time but bonds are meant to provide safety.
As interest rates continued to increase last year, existing bonds with lower interest rates were less attractive. Consequently, the value of those existing bonds declined.
There is a bright side. Current higher interest rates means that in the future bondholders will get a higher return on their investment.
Peter Watson is registered with Aligned Capital Partners Inc. (ACPI) to provide investment advice. Investment products are provided by ACPI. ACPI is a member of the Investment Industry Regulatory Organization of Canada. The opinions expressed are those of the author and not necessarily those of ACPI. Only investment-related products and services are offered through Watson Securities of ACPI. Peter Watson provides wealth management services through Watson Investments. He can be reached at www.watsoninvestments.com
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