Does it make sense to be invested in bonds when interest rates are projected to rise?
The case for maintaining a strategic, that is fixed, allocation to investment grade bonds is a strong one. For starters, interest rates are notoriously difficult to predict. Aside from that, analysis shows that maintaining exposure to investment grade bonds over the long term can improve the risk versus return trade-off for an investment portfolio with equity exposure. Improving the risk return profile of a portfolio typically involves lowering the volatility of an equity-only portfolio. Bonds have much lower volatility than equity investments. Consider that over the last 10 years, the volatility of annual returns for equities has been almost three times higher than that of investment grade bonds.1 But there are other asset classes that can be paired with equities to lower volatility. Exposure to cash, typically though a money market mutual fund, is a common approach. Unfortunately, there is usually a high cost in terms of return for an allocation to cash or other low volatility assets
