Misconceptions of bonds can prevent investors from fully enjoying their diversification benefits.
Myth 1
Bonds offer lower risk and therefore lower returns
Fact
Bonds can offer more attractive returns than stocks
Historically global bonds have provided better risk adjusted returns than equities. Over the last 10 years, the sharpe ratio (which measures risk adjusted returns) of global bonds was higher than that of global and Asian equities 1.
Myth 2
Bonds go up when stocks go down
Fact
Bonds can benefit from the same factors that drive stocks
Bonds tend to perform well in low growth environments where interest rates are low or heading lower. These are usually weak periods for stocks.
However, high yield and corporate bonds can also perform well when the economy is booming, and stocks are rallying. This is because stronger profits can lower the risks of such bonds not making their interest or principal payments.
Myth 3
You don’t need an active strategy for investing in bonds
Fact
Not all bonds are created equal
Passive investing by following bond benchmarks may not always be ideal as they tend to be dominated by countries or companies that have issued the most amount of bonds - not always the best reason to own a bond!
Bonds also come with different credit, default and ESG risks, as well as different maturities and currency exposures. As such, investors can benefit from an active selection of bonds by a financial professional.
Sources:
1 Global bonds as measured by Bloomberg Barclays Global Aggregate Index. Global and Asian equities as measured by the MSCI AC World and MSCI Asia Pac ex Japan Indexes. As of 31 Dec 2020.
