A defined benefit pension plan means a reliable, predictable flow of income, kind of like a bond.
So are bonds redundant if you’re fortunate enough to be a member of a DB pension plan at work? Technically, yes. Practically, probably not. Worry-free monthly pension payments may not be enough to settle your jangling nerves if your all-equity portfolio is in free fall during the next stock market correction.
A reader in a DB plan recently got in touch to ask about bonds. “I have a solid, though not over-generous, defined benefit pension plan at work,” she wrote. “I’ve been considering this as a substitute for the ‘bonds’ portion of my personal investing so my registered retirement savings plan and tax-free savings account are both all in stocks and exchange-traded funds. Is this a reasonable approach or am I missing something?”
This approach is reasonable for people who have a long investing horizon of at least 10 years and an established ability to shrug off stock market crashes like the 33-per-cent peak-to-trough decline in winter 2020, as the pandemic hit. All the rest of us should have some bonds.
Investors these days are particularly receptive to the idea of minimizing or skipping bonds. Strong stock markets are part of the reason, and so is an outlook for rising interest rates that has already pushed bond prices lower this year. For the first time in a while, investors are seeing declines in their bond and bond fund holdings.
Still, bonds are the best, easiest-to-access hedge against a stock market decline. When stocks plunge, money flows into bonds.
Having a DB pension could allow you to reduce your bond holdings, though. An investor who gravitated to a portfolio of 60 per cent stocks and 40 per cent bonds might consider a 70-30 mix, or even 80-20. A tilt to corporate bonds is also something to think about. Corporate bonds are less of a refuge than government bonds when stocks are falling, but they do offer somewhat higher yields.
A DB pension brings peace of mind in retirement by delivering worry-free monthly income. Bonds do something similar in investing portfolios by offering support in bad times for stocks. Most investors, even those with DB plans, should own some.
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