Should you add bonds in your portfolio?

It’s very common to see a portfolio include bonds, like this one: 40% bond, 40% stock, 20% cash, insurance or others.

Bonds is believed to perform better than stock in a bear market, so it provides diversification. What do we diversify? The risk. You should hear this before: don’t put all eggs in one basket. When market crashes, we don’t want to lose everything.

In a bear market, stocks decline. People tend to hold safer assets, like bonds. So bonds price will be stable or higher in bear market. But, be careful, when in a bull market, as people will sell bonds for riskier assets , like stock, holding bonds actually is not such a good idea. You will face declining bond price, and lose the opportunity to ride on stock surge. So bond to me is an expensive insurance to the portfolio.

Another point to consider is, in an environment with increasing interest rate, both stock and bonds tend to be negatively impacted. So bonds won’t really provide diversification here.

To me, an individual investor, I’d rather hold cash instead of bonds funds. Bond is cash with a little bit return (coupons), a little bit more price fluctuation, you won’t gain or lose significantly, either way. So, I prefer cash, and other alternatives.