For more than 30 years, I’ve had access to the country’s best investment strategies. As a result, I’ve employed The Oxford Club’s asset allocation… and certainly learned how to be a very successful stock investor in the process.
But my portfolio is missing one very important investment…
One that should help safeguard my wealth during market volatility like we’re seeing now…
Individual corporate bonds – especially “safe haven” bonds.
And there’s no time like the present to shift some of my assets around.
“For years now, the Club has been pounding the table about the importance of diversification,” says bond expert and Chief Income Strategist Marc Lichtenfeld. “The 2022 bear market emphasized that point. As stocks lost a quarter of their value (with small caps losing even more), bonds did exactly what they’re designed to do: pay investors a reliable income stream and return their capital at maturity.”
This isn’t the first time we’ve seen the resilience of bonds during a downturn…
If you had bought high-yield bonds in December 2007 and held them for five years, you’d have seen a total return of nearly 50%… on bonds alone!
Over the same period, the S&P 500 returned only 5.3%.
This is exactly why the Club advocates that you allocate a percentage of your portfolio to bonds.
But what I’ve held until now is what I would call “lazy investor” bond funds. In times like these, bond funds can be dangerous.
According to Marc…
A bond has a maturity date. On that maturity date, you will be paid the par value of the bond. Unless the company goes bankrupt, you will get the par value – usually $1,000. So if you paid $1,000 or less for the bond, you’ll get all of your money back and maybe more.
Though a bond fund is made up of bonds, the fund itself has no maturity. Therefore, there is no date on which you can assume a return of your capital. If the value of the fund is lower when you want to take your money out, you sell for a loss.
In a rising rate environment, the value of the bonds in the fund will decline – which will reduce the price of the fund.
“But wait – if I own the bond outright, won’t its value decline too?” you may ask.
Absolutely, it will. But that doesn’t matter if you plan on holding it until maturity.
That’s what really sold me on individual bonds…
Unlike a stock, which may never come back after a sell-off, a bond basically has two options at maturity. It will pay bondholders the full par value of the bond (usually $1,000 per bond), or it will default and pay nothing.
Of course, as with all investing, there is always the risk of loss. And in this crisis, we may very well see bond default rates increase. But defaults on blue chip or “safe haven” bonds are extremely rare. Historically, only about 2% of bonds default, and those are the most distressed bonds.
So, regardless of a roller-coaster stock market, midterm elections or any other black swan event, if I hold a bond until maturity – and the company behind it has solid fundamentals – I’ll be paid in full and receive interest.
These days, that kind of security is nearly impossible to find.
So which bonds should you target in this market?
Marc says that now is the time to keep maturities short. That way it doesn’t matter whether bonds are in a bull market, bear market or something in between.
“Remember, with bonds, we generally don’t care which way the market is going,” Marc says. “We’re investing in bonds in order to generate income, provide ballast in our portfolio for when stocks tank like we’ve seen recently, and in some cases provide capital gains when a bond has sold off.”
You also want to look for bonds that are trading at a discount (or below par). That way you could collect income and see price appreciation if you hold them until maturity.
According to Marc, that combination is “the best of both worlds in a turbulent market.”
And for the best research on corporate bond investing, I look to Marc and his bond VIP Trading Research Service, Oxford Bond Advantage, for individual bond recommendations.
In yesterday’s Oxford Bond Advantage, Marc recommended a bond issued by a for-profit university that’s transitioning to nonprofit status.
In fact, amid a national environment in which nearly 7% fewer high school graduates are enrolling in college, this university continues to set enrollment records.
Increased enrollment equals increased revenue. And the best part is, this university hasn’t raised its tuition in 14 years.
With many of my equity positions recently hitting their stop losses, I plan to take advantage of some bargain-basement opportunities in stocks… as well as individual corporate bonds just like this one.
If your portfolio is in need of some bond exposure, I strongly encourage you to do the same.