The formula used to determine the expected return on Wall Street stocks yields a result of 5.3%. It is the same rate as cash and low-risk corporate bonds. The stock market now pays like the bond market.

The new financial moment we are in, marked by high-interest rates and the struggle against inflation, is beginning to show a bill of contradictions. As is now the case with the yields of 3-month government bonds (symbol of liquidity), low-risk corporate bonds (investment grade category), and the yield supplied by S&P 500 index shares (prospective earnings yield at 12 months). In all three scenarios, these various asset classes offer the same return to investors.

However, according to experts, even if bonds appear appealing right now, long-term investors should not ditch an all-stock portfolio in favor of adding bonds. While the bond market suffered in 2022, so did the Nasdaq 100, which is heavy on technology stocks and has a higher potential for significant long-term gains.

One must consider the opportunity cost of abandoning the stock market in favor of bonds. If you didn’t include bonds in your initial plans, you probably shouldn’t include them now. Stick with your present asset allocation once you’ve decided on it unless your goals or time horizon alter.

If you already have a bond allocation in your plan, consider shifting to longer-term bonds. This is due to the fact that bonds with longer maturities are more susceptible to changes in interest rates. Long-term bonds will benefit the most if the Fed begins to lower interest rates. The mechanism is simple – existing bond prices tend to fall when interest rates rise, even if coupon rates remain constant: yields rise. When interest rates fall, the price of existing bonds tends to rise, while the coupon remains constant: yields decline.

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