Why now is probably the wrong time to shift your equities to bonds

I get it. The stock market is nuts. What is an investor to do? Move away from equities to bonds?

Not so fast.

I think you should avoid selling your equities and moving into bonds right now.

Before I get more into that, in a recent Globe and Mail article, I read National Bank Financial chief economist and chief strategist Stéfane Marion stated demographics are to blame for the shift away from equities. Based on research Marion was able to obtain, over the last 15 months, over $200-billion (U.S.) has left equity funds and over $250-billion has flowed into bond funds. This can be partially explained not because of the 2008 financial crisis and more risk-averse investors but because the age of the workforce is increasing and as a result there is a flight to safety.

If this is true (and there could be some truth to this) do you really want to be moving from equities into bonds with this herd? If you’ve already done this, that’s fine but here’s a few reasons why I’m not going along with you:

I’m not near retirement age. I don’t have the same flight to safety needs. I won’t retire for another 20 years. Even then, I hope to live another 30 years. 30 years is a long investment period even if it’s in retirement. Retirees can benefit from equities as painful as equities feel right now, at least this is my view.

While bonds can provide a reliable stream of income be mindful bonds over long investment periods provide lower returns than equities. Bonds provide returns just ahead of the rate of inflation and according to an excerpt from Warren Buffett’s recent letter to shareholders not even:

Even in the U.S., where the wish for a stable currency is strong, the dollar has fallen a staggering 86% in value since 1965, when I took over management of Berkshire. It takes no less than $7 today to buy what $1 did at that time. Consequently, a tax-free institution would have needed 4.3% interest annually from bond investments over that period to simply maintain its purchasing power. Its managers would have been kidding themselves if they thought of any portion of that interest as “income.”

Interest rates remain near historical lows. When interest rates rise, bond prices fall. When rates do climb in another couple of years (who knows when it will really happen) bond values will fall. If your objective is to buy low and sell high, this is not the best time to buy bonds. With more money from the herd flowing into bonds, bond prices rise.

If your objective is to use bonds, as part of a long term financial plan, I see no issue with rebalancing your portfolio with buying a few bonds now and again. That makes sense. However, with many stocks and equities in general beaten up over the last couple of years, I just don’t see why you’d be making an exodus from equities into bonds right now. You are welcome to put the blame on demographics or anything else, that’s fine. For me, I’m not following the herd and instead when the opportunities present themselves I’m doing the opposite – buying equities.

What do you think?