Should I keep bonds in my portfolio if interest rates rise?

What percentage of bonds should typically be allocated in my investment portfolio? With rising interest rates, is there a still place for bonds? If interest rates rise, won't that increase the risk of stocks as well? It seems to me that bonds could still reduce the total risk of my portfolio even if interest rates rise.

Investing, Bonds / Fixed Income, Stocks
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6 days ago
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It is easy to get caught up in the daily media coverage about rising interest rates and bond returns and forget why you own bonds to begin with. Fixed income serves two equally important roles in a portfolio: 1) to provide return, and 2) to manage portfolio risk. With rates as low as they are, the expectations for short term future total-returns from fixed income are quite low. However, this is not a good reason to shift assets away from bonds and into riskier assets because it ignores the risk management and diversification benefits of bonds.

A portfolio holding a mix of high quality and diversified bonds plays a critical role in managing portfolio risk, regardless of the prospects of future returns. Predictions of interest rate movements are no better than stock market predictions. Investor's should implement a consistent, diversified, long-term allocation that can weather different types of interest rate environments and conforms to your ability and willingness to take on investment risk. If interest rates rise quickly, the value of a high quality bond portfolio will decline. However, monies are continually reinvested at the new, higher rates as coupons are paid and short-dated bonds mature. As a result of this, history has had very few multi-year holding periods of high quality bonds with negative total returns. Even during a historical period of skyrocketing rates, high quality bonds have still been far less risky than stocks.

The allocation of your portfolio will depend on your investment time horizon, financial goals, ability to take on risk, and willingness to take on risk. There is no one size fits all portfolio allocation. However, all but the most aggressively allocated portfolios have a place for a bond allocation.

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