For Portfolio Diversification, Bonds Never Go Out of Fashion

By Jared Kizer, CFA

When it comes to portfolio diversification, the main purpose of fixed income, or bonds, is to protect the wealth you’ve worked hard to accumulate. While stocks provide greater potential for growth, bonds help insulate portfolios from the larger price swings of the stock market.

In fact, there’s only been one year since 1970 when both global stocks and five-year U.S. Treasury notes produced negative returns, and that year was 2022.1 So, why did last year prove to be such a challenging one for fixed income investors? The main reason was the significant increase in interest rates – the year-over-year increase in the five-year Treasury rate was the largest in the last 60 years.2 When interest rates go up, bond prices go down.

Although years like 2022 have been rare, naturally they can lead investors to question the value of fixed income within a diversified portfolio. While there is no perfect way to diversify a portfolio, investing in high-credit-quality bonds with relatively short maturity dates is typically the most reliable way to protect the portfolio from the risk that more volatile investments, like stocks, will experience losses.

For example, the most secure and creditworthy bonds are those backed by the U.S. government, which is unlikely to fail to repay investors. And a bond with a shorter maturity date – within one to 10 years – is safer because it is less sensitive to changes in interest rates over its time to maturity.

1 Sources: Refinitiv Lipper, DFA Returns Web. Stock index comprises global stocks, a 60% CRSP Deciles 1-10 Index and 40% MSCI EAFE Index. Bond index is the 5-year US Treasury Notes Index.
2 Source: Federal Reserve Economic Data (FRED). Yield on five-year constant maturity Treasury bond from 1963-2022.
3 Source: U.S. Treasury Department’s Daily Treasury Par Real Yield Curve Rates.
For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based on third-party data and may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Performance is historical and does not guarantee future results. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this document. R-23-5194

Ready to take the next step?

Advisory services are offered through Worthen Financial Advisors, Inc.; an investment adviser domiciled in the state of Texas. This communication is not to be directly or indirectly interpreted as a solicitation of investment advisory services to residents of another jurisdiction unless the firm and the sender of this message are registered and/or licensed in that jurisdiction, or as otherwise permitted by statute.
Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended and/or undertaken by Worthen Financial Advisors, Inc[“Worthen”]), or any non-investment related services, will be profitable, equal any historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. 
Worthen is neither a law firm, nor a certified public accounting firm, and no portion of its services should be construed as legal or accounting advice. Moreover, you should not assume that any discussion or information contained in this video serves as the receipt of, or as a substitute for, personalized investment advice from Worthen. Please remember that it remains your responsibility to advise Worthen, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. A copy of our current written disclosure Brochure discussing our advisory services and fees is available upon request. The scope of the services to be provided depends upon the needs of the client and the terms of the engagement.


— or —