Bonds Have Lost Their Purpose?

Before we checked out of our hotel in Auckland we had Bloomberg TV on and there was a segment where the guest mentioned his belief that bonds have lost their purpose; with their purpose being income and diversification.

This is both funny and sad. People do think of bonds as being income vehicles and for the last few years many segments in the bond market have paid little to no interest. Also CDs and passbooks have paid little to no interest.

This is painful for individuals who live (mostly) on interest income and problematic for pools of money like pension funds who have to meet very specific future liabilities. Some take this to be an argument for investing more in stocks which I disagree with. Stocks and bonds have different characteristics and react differently to market and external events.

I do believe that bonds are more expensive that stocks these days as bonds are pretty much out of room to the upside as rates are unlikely to go negative (or more correctly ever stay negative). However there will be some sort of market event (talking generically) that causes stocks to drop, sends people to bonds and leaving many people finding out at the wrong time they had too much in equities. This has repeated over and over in stock market history.

Overweighting or underweighting stocks versus bonds in one direction on some sort of moderate basis is reasonable, in my opinion, and something we do on occasion but someone who targets something like a 60/40 mix who then puts the 40% into dividend stocks or MLPs or the like (so he is now 100% equities) is going to get punished at some point.

I've talked quite a few times about our attempts to add yield without going far out on the risk spectrum. We do this by using various types of products avoiding huge exposures to any one segment but it is not like we are averaging 8% yields in a zero percent world. We do not want to take on that type of risk in the fixed income portion of the portfolio.

For anyone interested a couple of thoughts about our first impression of Rarotonga. It seems as though it is to New Zealanders as Hawaii is to Americans although it is a different country they use the same currency here as in NZ. If anyone knows differently please leave a comment. The impression we've gotten is that there is not a lot of wealth but that the quality of life that people enjoy is pretty good; people seem to be pretty happy here.

The island is tiny and the population is very small. The phone numbers here only have five digits which I get a real kick out of. Many tourists rent scooters to get around the island and many of the residents drive them too. One kind of neat thing is that you have to get a driver's license to rent a scooter. The Budget dealer, tested me, issued a temporary license so I could go to the police station to get a permanent one (it only lasts for one year). The entire visit to the police station was less than ten minutes. It is very similar to the license issued in AZ in that is plastic like a credit cards and looks for all the world like a drivers license and while it is obviously intended as a money maker it makes for a neat souvenir.

The island is tiny, we drove around the entire place in what seemed like less than two hours driving very slowly; the speed limit is 40k. I mentioned in the international living post from the other day about some serious differences at the grocery store in NZ and on TV there. Well all the more so here at the store and our TV gets only one station that appears to be from Australia although I flipped it on once and found an Italian soap opera.

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Bonds Have Lost Their Purpose?