Some People Are Saying Bonds Don’t Provide Diversification Benefits, and They Couldn’t Be More Wrong

Some People Are Saying Bonds Don’t Provide Diversification Benefits, and They Couldn’t Be More Wrong

Recently, one of our clients asked our opinion on an article he found. We get these types of questions pretty frequently, and normally we just walk clients through what the article means for their portfolio (and often, why it’s wrong). But this one caught my eye because it is wrong in a new and different way. Plus I’m on a statistics kick, and this article plays into that really nicely. (You can see my last two articles on understanding risk and uncertainty here and here. I’m on this kick because I’m actually in the middle of developing an investment ecourse – let us know if you are interested in learning more about it.) The basic gist of the article is that bonds don’t actually provide any diversification benefit when you use them with a stock portfolio. The reduction in both your portfolio’s returns and standard deviation are really the result of reducing your equity exposure – not the diversification benefit from the bonds. The article also claims that “bonds merely serve as a return booster to cushion the opportunity cost from a lower equity weight” and that bonds went down with stocks during the global financial crisis (I’m just going […]

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Source: Retirement Researcher

Some People Are Saying Bonds Don’t Provide Diversification Benefits, and They Couldn’t Be More Wrong

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