Thursday, July 25, 2013

Bonds are the only safe haven in times of economic stress

     When the NC House passed Senate Bill 558 last night, the proponents of the bill said the North Carolina Retirement System pension fund needs to sell a huge chunk of its bond portfolio and put more into alternative investments and real estate.  I guess the folks that want this bill have very short memories.  They have obviously forgotten that during periods of economic stress (2008 for example) the only true safe haven is bonds.  

     Not even heaven will be able to help the NCRS pension fund during the next economic stress test if S558 becomes law and our state treasurer sells much of the bond portfolio as she plans.  It is mathematical fact that if you don't own bonds, your portfolio will be decimated during economic stress.  Here is a quick reminder of how ugly it can get.
How quickly we forget.

The chart below from a recent Vanguard analysis further drives home the point that selling bonds from a portfolio in favor of ANY other asset class raises the risk profile of the portfolio.  

Vanguard's point is: yes, it stinks that bonds now have very low yields, but you own them more for their ability to diversify portfolio risk during high-risk episodes than for their income properties. Observers of the NCRS pension investment results,  hold on to your hats, the ride is about to get much more bumpy. 

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