U.S. Markets closed

Labor Day barbecues, beaches, and bonds: Why it’s all about balance

Matt Tucker, CFA of BlackRock

Labor Day barbecues, beaches, and bonds: Why it's all about balance (Part 1 of 4)

If you’re Matt Tucker, everything reminds you of investing, even the last barbecue of the summer. Read on to discover how your bond portfolio may very well resemble a Labor Day mixed grill.

I’ll be spending this holiday weekend with family, enjoying the last days of summer outdoors and preparing a meal or two on the grill. What do Labor Day grilling festivities and investing have in common? Plenty. Preparing the perfect meal requires an optimal balance of nutrients, just like building a portfolio requires the right savory combination of investments. Here’s how I would prepare a fixed income mixed grill.

Chicken as Treasuries

The most basic protein, chicken, is a fixture of any barbecue menu. The same can be said for Treasuries in a bond portfolio. Treasury securities, in a variety of maturities, provide more safety than any other investments as they are backed by the full faith and trust of the U.S. government, do not have a call provision, and provide a dependable income stream. They are also the ultimate diversifier for equities and other tasty higher-risk dessert items.

Market Realist – The graph above shows the movements of the S&P 500 (IVV) and ten-year Treasury (IEF) constant maturity rates. As of June 2014, the correlation between the S&P 500 and ten-year U.S. Treasuries was 0.02 for one year, -0.50 for three years, and -0.28 for ten years.

Treasuries are often considered safe haven assets. They benefit from financial market turmoil and geopolitical tensions. This is why Treasuries don’t move in tandem with stocks and can help lower your risks and volatility and boost your safety.

During the financial crisis of 2008, the S&P 500 Index (SPY) returned -38% for 2008. Meanwhile, high yield bonds (JNK) returned -17% for the same period. In stark contrast, the iShares Trust Barclays 20+ Year Treasury Bond Fund (TLT) gave year-end returns of 34%. This helps show how Treasuries can cushion the impact of a drastic slump in other segments of the markets.

Read on to the next part of this series to understand how investment-grade bonds can be part of your portfolio.

Continue to Part 2

Browse this series on Market Realist: