*source material from Schroders
Traditionally, bonds have been perceived as an effective means of diversifying a portfolio and providing yield. Over the years, investors have become accustomed to a reliable environment where bonds protect them from losses when equity markets fall. Last year, this assumption was uprooted, leaving some in a strange situation with their lowest risk exposed.
Bond Performance in the Previous Year:
Even though bonds are typically included in a multi-asset portfolio, their benefits were not so evident last year. Typically, bonds protect investors from losses when equity markets decline. But this assumption was proven wrong last year. Even the lowest-risk clients experienced losses similar to those with higher risk.
Lack of Preparation for Inflation in 2022:
It is a common notion that investors were unprepared for inflation at the beginning of 2022. Those who invested in a mix of global government bonds earned a mere 1% yearly return. However, market interest rates surged, with inflation peaking at over 10% globally. The yield generated by bonds was quickly overshadowed by capital losses, creating a challenging situation for bond investors.
When investing in bonds, important market dynamics must be considered - such as interest rates and inflation. As inflation decreases, possibilities will emerge. However, past successes do not guarantee future success! When including bonds in multi-asset portfolios over time, be mindful of potential risks and adjust strategies accordingly.
Higher inflation and rising market interest rates have created attractive yield opportunities. This could potentially help investors recover losses and provide a buffer against further rate increases. However, inflation's uncertain future renders it challenging to rely completely on bonds for diversification. It might be worth focusing on the yield bonds can offer - this is possibly becoming their primary role in the current market environment.
The article outlines just some of the things you could consider in relation to multi-asset portfolios. It does not represent financial advice. If you would like personalised financial advice, please contact a financial adviser. Remember that the value of investments can fall as well as rise, and that past performance is not a guide to future performance.