According to CNBC, Warren Buffet “said that bonds are a ‘terrible’ investment right now because they are ‘priced artificially’ high ... and could lose people a lot of money when inevitably interest rates start to rise.” Chartered Financial Analyst Steve Lowrie says he disagrees with Buffett, but I think the two are actually talking about different things.
Buffett says he believes that interest rates are set to rise at some point and this will hurt bond prices. This is a statement about expected bond returns over the next few years. Buffett makes no claims about the volatility of bonds, just that their expected returns are poor.
Lowrie objects that investors have a limited capacity for risk and cannot handle an all-stock portfolio. This is true of most investors. However, Lowrie is talking about the volatility of bonds (specifically that it is lower than the volatility of stocks); he is not talking about bonds’ expected returns as Buffett was.
Investors who believe both Buffett and Lowrie can use GICs (or very short-term bonds) for the fixed income part of their portfolios. This avoids the upcoming hit to bond prices that Buffett predicts and avoids increasing portfolio volatility that Lowrie says investors cannot handle.
Apparent disagreement resolved.