Interest rates should have no affect on your allocation to bonds. You don't add bonds for yield, you add them the reduce the volatility of your portfolio.
That being said, no one can decide for you how many bonds you should have. It's based on your willingness, need, and ability to take risk. Just knowing your age isn't enough information to determine that.
Hi Dodge, while i agree conceptually, in practice I find it difficult to hold bonds myself currently, even despite being on the cusp of FIRE and wanting to reduce risk and increase steady income flow. I guess it depends a lot where you are, but in particular for Europeans looking at negative yields, ecb just starting an unpredictable qe policy, risk of haircuts/govt defaults, etc. I read in the FT the other day 30yr German govt bonds have returned 43% in the past year and yield is below 1% for the first time ever. Defensive assets are not supposed to behave like this. Japan is in the same category for a long time.
I read a Buffett article the other day where he was saying bonds are supposed to be for risk free returns but now their priced for return free risk. He wrote that 3 years ago and it seems to me much worse now.
In Australia my home country, you can still get bank deposits at 4% and these are govt guaranteed up to 200k. For my case, that seems a much safer place than bonds too. These are floating rates not fixed, but at least I know my principal is guaranteed and will not take a hit if interest rates suddenly start rising from the current 50 year historical lows.
I guess it might be different if you've had a bonds allocation long term and continue to rebalance it. But for people looking to add bonds right now to their investment mix, I personally think there are some reasons to pause and consider the timing, risk versus reward, and eventual normalization of unconventional central bank policies.
Everyone knows (well almost everyone) not to market time the stock market. The bond market is no different. My standard "market-timing bond" response is below, but I'll add one more chart, just for fun :)
You might not see it, but this is market timing. Ignore the noise, the news reports, and the doomsday articles. You can't guess where the market will go next. Let's review what happened to bonds the last time interest rates soared:
Interest rates spiked pretty high from 1975 through 1981 (the peak). Let's see what happened to intermediate term bonds during this time (orange line):
A $10,000 deposit grew almost 60%!This is why we say ignore the noise.
------
Now let's look at another point on the chart, the two decades from 1950-1970, where interest rates tripled from their record low. What happens to bonds then?
Unfortunately Morningstar's Intermediate bonds graph doesn't start until 1955, so I added "High Yield Bonds", a category which should be
more negatively impacted by a rise in interest rates. Looking at the chart, we see:
- High Yield Bonds more than tripled during this time. With a $10,000 deposit growing to $31,775.33
- Intermediate Bonds more than doubled during this time, despite not starting until about 1955. A $10,000 deposit grew to $23,435.50
If savings accounts are giving you 4% in your country than bonds are likely giving more. Indeed, Vanguard's Australia Bond index has a 5% yield currently -
http://etfs.morningstar.com/quote?t=VAF®ion=aus&culture=en-US
