When interest rates are very low, investors often question the value of bonds. This is especially true when bond yields don’t even offer enough to keep up with inflation. And when interest rates rise, bonds can lose money, as we saw in 2022. Bonds, in other words, can be unpredictable.
And yet, I still recommend bonds. Charlie Munger, Warren Buffett’s longtime partner, helps explain why. He often says, “The first rule of compounding is to never interrupt it unnecessarily.” But that’s sometimes easier said than done. When the market drops, many investors become more cautious and reduce their stock market holdings, thus violating Munger’s rule.
That is where bonds can be helpful. If you have enough funds stashed safely in FDIC- insured cash and short-term government-backed bonds, that can help give you the fortitude to ride out stock market downturns. That, in my opinion, is the most important role of bonds.
In other words, don’t look at bonds as an instrument to help you make money in and of themselves. Instead, look at them as playing a key supporting role to your stock portfolio, so it can continue growing uninterrupted through thick and thin.
