AAII Survey: Retail Investors’ Taste for Fixed Income

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In general, investing in debt instruments (bonds, bond funds, etc.) is safer than investing in stocks. That’s because debtholders have priority over shareholders–if a company goes bankrupt, debtholders (creditors) are ahead of shareholders in the line to be paid. In this worst-case scenario, the creditors usually get at least some of their money back, while shareholders often lose their entire investment.

While, in the long run, stocks will outperform bonds, bonds outperform stocks at certain times in the economic cycle. Bonds offer some protection during periods of economic decline.

Historically, the rule of thumb has been to increase your portfolio allocation as you get older. Retirees, for instance, often rely on the predictable income generated by bonds. By owning bonds, retirees are able to predict with a greater degree of certainty how much income they’ll have in their later years.
However, research over the last several years warns investors not to become too conservative. As we live longer, a higher allocation is needed to ensure our retirement nest eggs last as long as we do.

AAII Weekly Survey Question

Given this shifting perspective on bonds, we were curious to see the role they play in the portfolios of our readers. So last week’s survey question asked:

What percentage of your investment portfolio is in fixed-income investments (individual bonds, bond funds, etc.)?

Here are the results:

In all, 2,300 votes were cast.

There was an even split–28% each–between those that have 26% to 50% of their portfolio in fixed-income and those that hold 11% to 25% of their investments in fixed income.

Roughly one-fifth of our readers–21%–say they hold less than 10% of their total portfolio in fixed income.

Another 14% say they do not hold any type of fixed-income investments and the remaining 9% say they have more than 50% of their portfolio in bonds or bond funds.

Weekly Special Question

To see whether our readers’ perceptions of bonds have changed, our special follow-up question asked:

How has your opinion of bonds changed over the years, if at all?

In all, we received 247 responses.

The majority of the responses state that opinions regarding bonds have not changed over the years. The single biggest response–15%–is that opinions have not changed regarding bonds.

However, more people have come to view bonds more negatively over the years than those who have come to view them more positively.

Ten percent of responses say that bonds are useless and have no place in their portfolio.

Another 10% say they would rather hold dividend-paying stocks instead of bonds or bond funds.

Nearly 10% say that bonds look better the older they get.

Roughly 7% of those responding say that bonds are a good way to reduce portfolio risk.

Here is a sampling of what our readers have to say about bonds as an investment vehicle:

  • “[Bonds] are less “safe” (safety of principal) now than years before – people and companies are more easily moved to bankruptcy and bonds are now created without protection.”
  • “Due to long years of low yields, my retirement is much more difficult than planned.”
  • “A decade ago my only investment in bonds, fortunately, was a Lehman Brothers bond that lost 90% of principal. That debacle inspired me to invest ALL my retirement funds in individual common stock.”
  • “As I get older I’m becoming less interested in bonds and all fixed-income investments. They seem to have very limited upside potential but often severe downside risk.”
  • “I could not imagine that rates could go so low for so long.”
  • “I realized early on that the bond market was far more complex and nuanced than I had thought. Extremely low-interest rates have killed the value of bonds.”

Everybody has an opinion! Why not give us yours? Participate in our weekly member poll, updated every Monday, and see the results online at www.aaii.com/memberquestion.

 

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