Risk Management with Fixed Income: The Quiet Power of Bonds

By: Tom Betros, CFA, CFP®

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 Key Takeaways

• Despite the recent past, history shows that fixed income can still play an important role in portfolio management.

• The less volatile, income-producing nature of fixed income returns make the asset class a more desirable place for conservative investors and those looking to diversify away from equity markets.

• Unlike some forms of risk management, fixed income markets are easily accessible to the investing public.

In recent years, investors have experienced unusual challenges in the fixed income markets. An inflation spike caught investors off guard as the Federal Reserve was forced to raise interest rates rapidly in 2022 which brought unprecedented volatility to the asset class. With equities also declining in 2022, investors did not get much relief from investing in a historically stable, interest-paying asset. Looking forward, with inflation mostly under control, we think there are reasons to be optimistic about the benefits of fixed income.

First, interest rates are at attractive levels. Looking through the last 20 years, government interest rates have only been higher in 2023-2024 and 2006-2007. Secondly, when equity markets decline, fixed income can provide a much-needed buffer to mitigate volatility. Since 1990, there have been 10 calendar years when global equity markets had negative year-end returns. In 9 of those 10 instances, bond returns were positive with the exception being 2022. And in all other years, bond returns have only been negative twice. The following chart produced by Dimensional Funds illustrates Global Stock Market Returns vs. Global Aggregate Bond Returns since 1990.

So, what does this mean for fixed income as an investment?

The income-producing nature of fixed income is part of what makes it especially appealing to conservative investors and retirees. But its benefits extend beyond income: bonds also provide meaningful diversification away from equity markets. When stocks become overheated or turbulent, fixed income can help smooth the ride, reduce drawdowns, and improve risk-adjusted returns over time.

Fixed income markets have also never been more accessible. Investors can get diversified exposure via ETFs, Mutual Funds, and can purchase Individual Bonds through most brokers. ETFs and Mutual Funds also enable investors to achieve more precise, targeted exposures such as duration or credit quality management through a single, or a few diversified funds.

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The information provided in this blog post is for general informational purposes only and should not be construed as personalized investment advice or a recommendation to buy or sell any security. D’Arcangelo Financial Advisors, LLC does not guarantee the accuracy or completeness of the information presented. Readers should consult with a qualified financial professional before making any investment decisions. Past performance is not indicative of future results. All investments involve risk, including the potential loss of principal.