Understanding Investing

The Role of Bonds in a Growth Portfolio

Bonds have an important and valuable role to play in a growth portfolio.

While bonds might be regarded as a defensive, lower growth investment, they have an important and valuable role to play in a growth portfolio. An allocation to bonds could reduce the pain of loss without impacting an investor’s long-term goals.

The Power of Bonds

Bonds are widely regarded as a defensive, income-generating investment that delivers lower results than stocks. But, this doesn’t mean they can’t be used successfully in a growth portfolio.

Take for example an investor in the early accumulation phase who is focused on building her wealth. She requires a sizeable allocation to assets like equities to achieve her growth objectives but she also wants to reduce the volatility of her portfolio and, ultimately, the chances of negative returns.

An investment in bonds could provide the stability she requires without a significant reduction in growth. For example, in the 20 year period from 1998 to 2017, a portfolio of 100% U.S. equities would have delivered an average annual return of 7.20% with volatility of 14.87%.

If however, the portfolio was diversified with a 40% allocation to U.S. bonds, the volatility would have reduced to 8.90%. Critically, similar levels of growth would have been achieved with an average annual return of 6.62% – only 0.58% less than a 100% equities portfolio.

Two pie charts represent two different bond allocation strategies: one hypothetical portfolio is 100% in U.S. equities and one hypothetical portfolio is 60% in U.S. equities and 40% U.S. bonds. The portfolio that is 100% in equities performs slightly better than the other portfolio, however, volatility is higher. Equities are represented by S&P 500 Index; bonds are represented by the Bloomberg Barclays U.S. Aggregate Index. 
Data is for the period from 1998 to 2017, as of 31 December 2017. Hypothetical example for illustrative purposes only. Equities represented by S&P 500 Index; Bonds represented by the Bloomberg Barclays U.S. Aggregate Index. Volatility measured by annualized standard deviation of returns.

It is not possible to invest directly in an unmanaged index. Results shown do not represent past, or predict future performance of any specific PIMCO product or strategy.

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All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets.

Hypothetical and simulated examples have many inherent limitations and are generally prepared with the benefit of hindsight. There are frequently sharp differences between simulated results and the actual results. There are numerous factors related to the markets in general or the implementation of any specific investment strategy, which cannot be fully accounted for in the preparation of simulated results and all of which can adversely affect actual results. No guarantee is being made that the stated results will be achieved.

There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. No representation is being made that any account, investment product, or strategy will or is likely to achieve profits, losses, or results similar to those shown. Investors should consult their investment professional prior to making an investment decision.

This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2018, PIMCO.

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