Disagreeing with Warren Buffett: An Argument for Bonds

July 2018.

By Jeff Headrick, Financial Planner

In a February article I read in Reuters (Buffett Says 'Terrible Mistake' for Long-Term Investors to be in Bonds), Warren Buffett is quoted as saying that it is a “terrible mistake” for long-term investors to be in bonds. It is these one-size-fits-all type comments that make a financial planner’s job challenging. I have immense respect for the Oracle of Omaha, but I’m going to have to disagree with him on this one.

The Question

The term Long-Term Investors could allude to the head strategists at large pension funds. Aren’t these Long-Term Investors? Long-Term Investors could also allude to the average blue-collar investor two years from retirement, that is getting ready to start withdrawing from his IRA. Technically, these are both Long-Term investors.

So, when you hear that Warren Buffett said it’s a terrible mistake for long-term investors to be in bonds, is he talking to you?

The Argument for Bonds

I fully acknowledge the fact that bond performance has been better and looked brighter than now. In fact, five-year past performance of just about every bond class has been woefully subpar.

I have had several clients and prospective clients question their bond holdings as of late. Each time I hear these legitimate concerns, I like to explain to folks what bonds did in 2002 and 2008. And each time, I share with them that several bond asset classes in the past held up very well during these downturns.

There are short-term bonds, medium-term bonds, long-term bonds, international bonds, emerging market bonds, and high-yield bonds. I could keep going. My point is that while some bond asset classes are highly correlated to equities, some are not. And based on my personal experience during 2002 and 2008, I can attest that there was indeed something to hold onto in both years to keep the whole ship from going down.

However, this may or may not be the case in the future! And, I still have heard not back from Amazon Prime about that Crystal Ball Stock Market Predictor I am waiting for them to invent. But based on past performance, I don’t think you can eschew bonds for everyone all the time unless you primarily sell stocks for a living.

Understand the Context: Cool Comment, Does it Pertain to Me?

A question you might want to ask yourself when you read Warren Buffett’s statement is: How does this pertain to me? Or, what is the context of this statement? Taken out of context, absolute statements spoken with confidence and conviction--- can sometimes lead us astray.

Try to understand the context of everything that you read and hear, question everything, even the author that you’re reading, and most of all---do your own research. It is only after these stringent vetting processes have been performed, that we tend to make the best investment decisions that we possibly can.