The Motley Fool

Are bonds a better buy than stocks for 2018?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Shopping cart with boxes labelled REITs, ETFs, Bonds, Stocks
Image source: Getty Images.

With stock markets across the globe having made record highs in recent months, many investors may be contemplating selling their holdings. After all, most are likely to be significantly in profit and while there could be further gains ahead, all bull markets in history have been cut short by a bear market.

One asset which is generally popular for more defensive-minded investors is bonds. Historically, they have provided a counterweight within a portfolio against the threat of falling share prices. But is now really the time to sell shares and buy bonds?

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Interest rates

With Donald Trump’s tax and spending plans having the potential to send inflation higher, the Federal Reserve seems to be on alert to a rapidly-rising price level. Certainly, a new Federal Reserve Chair could mean a policy shift, but if inflation does move higher then rising interest rates are very likely to be the end result.

Additionally, interest rates across the developed world are also likely to move in a general upward direction in future. An ultra-loose monetary policy seems redundant, since the financial crisis is now assigned to history rather than being a present-day phenomenon. Therefore, the justification for low interest rates at a time when Europe and the US are both performing well economically may become more challenging to make.

Bond prices

Since the prices of bonds generally move inversely to interest rates, a more hawkish monetary policy could cause fixed interest securities to decline in value. Therefore, if the current bull market in stock prices continues, it would be unsurprising for bonds to significantly underperform equities over the medium term.

However, should a correction or even bear market take place, bonds could perform relatively well. Investors may flock to assets that are seen as more defensive, while interest rate rises may be put on hold as policymakers seek to support economic growth. In such a scenario, holding bonds within a portfolio could prove to be a sensible move.

Risk/reward

Of course, not all bond prices will move in the same direction under different market conditions. For example, bonds with AAA credit ratings will be likely to prove much more popular during a bear market than those from an issuer which has junk status. Therefore, investors seeking to generate greater diversity in their portfolio and to reduce overall risk may be better focusing on higher-quality bonds.

Despite this, the pending interest rate rises which could be ahead and the current Bull Run that is taking place mean that stocks may still be a better buy than bonds. They seem to offer significantly higher rewards and while riskier, their overall risk/reward ratio seems to be more enticing.

While holding some bonds, cash and other assets as part of a diversified portfolio is a sensible approach for long term investors to take, moving from stocks to bonds does not appear to be a worthwhile pursuit at the present time.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.