Greetings!  

We've all heard the adage: Past performance is no guarantee of future results. Yet we constantly examine past performance to gain a bit of insight into the future. Consider what insights the past provides regarding investment in bonds, and what that could mean going forward.

The performance of bonds is related to the movement in interest rates, and we have detailed information dating back to 1948 on the relation between the two. From 1948 - 1981, interest rates generally rose. During that period, an all-bond portfolio averaged 3.83% per year. From 1981 - 2012, interest rates generally fell, and an all-bond portfolio produced an average annualized return of 8.82%. (1) 

With some sectors of the bond market posting record low rates, many investors have begun to question the wisdom of owning bonds in their portfolios. Surprising as it may seem, portfolios with a blend of stocks and bonds actually provide a smoother ride and achieve a higher average long-term return. An investor who avoids any asset class completely is making a guess that it will underperform and that another asset class will outperform. Building prudent portfolios is not about guessing and timing, - it's about broad diversification. 

Even now, taking the pending rise of interest rates into account, a look at the specific types of bonds in a client's portfolio is necessary to determine whether changes are warranted because different types of bonds have different reactions to interest changes.  Aspects such as duration, credit quality and whether the bonds are domestic or international can have a shielding effect. 

By design, a diversified investment portfolio is insulated - not completely, but largely - from the normal swings in performance among its various components. The underperformance of one or several of its ingredients will not sink the performance of the overall portfolio.  In fact, a strategically built, diversified portfolio will always include asset classes that have underperformed within a given time frame. This is unavoidable.  But it's the overall performance of the entire portfolio that matters. 

We can't predict with accuracy the future returns of various asset classes, but based on the past data, it is clear that building diversified portfolios helps reduce the need to make such forecasts.  

(1) Israelson, Craig L. "Bond Analysis: The Road Behind"  Financial Planning. March (2013): pg. 74