Historic Low Yields Mean Dismal Future Bond Returns. What Can I Do?
Posted: Jared Jameson
We have written in the past about how to address an upcoming dismal period for bond investors. See here and here. In this blog, I address advice I often hear and read in the financial press and from market pundits. After lamenting low yields, the pundit suggests something like the following: “Since yields on bonds are so low, why not just buy stocks with high dividend yields?” At first blush this seems like good advice. Today (8/19/2021), the Vanguard High Dividend Yield ETF (VYM) yields 2.75% while a 10-year treasury bond yields 1.24%. The stock portfolio earns a premium of 1.5% over the treasury bond. Seems like I can’t lose. You can!
The reason is that stock prices move a lot more than bond prices. Historically, like 10x to 20x more. During the COVID selloff last year, treasury bonds made money while VYM dropped 32%. A pickup of 1.5% a year in yield doesn’t really seem appealing if it might take many years to recoup the price change. Does it? Remember stocks are not bonds. Most investors own bonds to protect portfolios when stocks crash. By replacing safe bonds with risky stocks, albeit with a nice yield, your entire portfolio is now going to crash along with the market. How is this good advice? You’ve completely changed the character of your portfolio. Yield is only one characteristic of an investment and solely focusing on one aspect of any investment can lead to very poor overall portfolio decisions.
I’ll close with some advice of my own. Next time you read/hear this advice simply tune out the rest of what the author/speaker has to say. They are not talking about your portfolio.