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Are bonds part of an investment portfolio so that you can invest during a dip in the market? (I heard this from a robo-advisor as it allows you flexibility to invest during a downturn)

Or do bonds exist to maintain a portion of your portfolio during a market downturn?

  • 2
    I suppose when you say 'market' you mean 'equity market'. Equities aren't the only financial instruments that get traded on a market... – AakashM Jun 7 at 7:45
  • Not unless you are a fund manager that also make a cut from switching various financial derivatives. In fact, if you read Daniel Kahneman opinion in Thinking, fast and slow, lots of "investment tools" are invented to show the fund manager is "doing something". For the serious investor, one will check whether those companies inside their portfolios are sound and within the reasonable PE (price earning). – mootmoot Jun 7 at 7:54
  • Do take note that, purchasing bonds from upon face trade value is totally different than market value. In fact, it is counter-intuitive to buy bonds during a real market dip. – mootmoot Jun 7 at 8:06
  • Thanks for all the comments here. For context, my portfolio is made up of market index funds, and the thought was to also include bond index funds. – akyeung Jun 14 at 2:36
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If you have bonds in your portfolio and a proper process for periodically rebalancing to keep the proportion invested in bonds constant, then that process will automatically mean that you invest during a dip in the market. If equities fall, but the less volatile and to a degree counter-cyclical bonds do not, then the proportion of your portfolio invested in bonds will increase, and rebalancing will require you to sell bonds and buy equities. And vice versa during market upturns, of course.

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    +1, to add to this, you want assets in your portfolio that are uncorrelated with each other so that rebalancing is more effective. Bonds are probably the most uncorrelated to the other typical assets in portfolios (e.g., US stocks, international stocks, etc.) – gaefan Jun 7 at 11:37
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What is the purpose of bonds within an investment portfolio?

https://www.goodfinancialcents.com/bonds-vs-stocks

"Investment diversification: Because bonds pay a fixed rate of interest and guarantee principal payment at the end of the term, they’re generally considered safer than stocks, typically held as a diversification to stocks in a well-balanced portfolio. Bonds help the portfolio retain value during stock market downturns."

Are bonds part of an investment portfolio so that you can invest during a dip in the market?

That makes no sense, because bonds are investments. You'd have to sell them (possibly at a loss) to generate the cash needed buy stocks.

That's why you want some CASH in your investment portfolio "so that you can invest during a dip in the market". (Not much; maybe 5%.)

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    Selling bonds to buy stocks is totally legit and is known as rebalancing. – stannius Jun 7 at 15:29
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    @stannius sure it's valid, but it has nothing to do with "so that you can invest during a dip in the market". – RonJohn Jun 7 at 15:36
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    What about the savings/better return due to lack of income tax on certain types of bonds? Or is that not enough to really matter in the grand scheme of things? – ivanivan Jun 7 at 18:53
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    @ivanivan I would say that would be a determinant of what type of bond to buy. – RonJohn Jun 7 at 19:09
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    I find this misleading. 5% in cash isn't going to carry you out of a downturn (95% * 60% + 5% = 62%). Even if 5% cash was enough to have an impact, you don't mention "selling your cash at a loss" (inflation) which will give you a ~13% loss every 7 years (7 being a rough estimate of recession interval). To bring that into perspective, before yield Max - Min for the following: VUSTX (long-term treas) = ~20%, VFISX (short-term treas) = 9%, VGIT (inter-term treas) = 12%. So your 5% cash is losing around the worst possible rate for bonds, except bonds also have a yield. – aidan.plenert.macdonald Jun 8 at 1:09
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Bonds are usefull because you get more income than for shorter instruments and have a guaranteed repayment.

You know how they say to keep 5 years reserve upon retirement so you do not have to sell stocks during a market crash? Bonds can be staggered to give you yearly payback (just buy bonds with 1,2,3,4,5 years expiration) and give a better return than cash in the bank. Good for the mid term "riding out a bear market" planning if you do not build an investment portfolio around extremely strong cash flow.

Funny enough during real crashes in the stock market you may even sell the bonds with a profit - because to stabilize the market, interest rates may go down. But that is not the primary reason. The primary reason is actually to park funds.

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    The bond derivative market is not as straightforward, there are junk-bonds with a high risk of default, secure bonds that trade above the face and future maturity value. – mootmoot Jun 7 at 9:53
  • What do you mean by "shorter instruments"? – Acccumulation Jun 7 at 15:04
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    Obviously instruments with shorter runtime. Also called bills. – TomTom Jun 7 at 16:10
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Bonds are less risky, so having them in your portfolio is a "hedge" against market downturns. However, that's largely psychological; if you really want to lower your risk, you should just keep some of your portfolio as cash.

Another justification for them is that they are considered a separate "asset class", which means, among other things, that the correlation between stocks and bonds is significantly lower than within stocks, or within bonds. This increases diversification. It's not quite clear what you mean by "Or do bonds exist to maintain a portion of your portfolio during a market downturn?", but this might be what you mean: if there is a downturn in the stock market, then having bonds may reduce the impact somewhat. Of course, you'll be maintaining a portion of your portfolio during a market downturn no matter what anyway, unless you're heavily leveraged: the market has never lost all of its value.

Are bonds part of an investment portfolio so that you can invest during a dip in the market?

Again, it's not quite clear what you're saying here. You seem to be saying that if the stock market dips, then you can sell bonds and use the money to buy stocks. However, the Efficient Market Hypothesis says that the expected returns from the stock market after a dip are no larger than those without a dip.

  • thanks for your input, i was paraphrasing advice i heard from a robo-investor advisor, and so that is why I asked the question, and why it is not quite a clear statement from me! – akyeung Jun 14 at 2:40

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