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Now This Is Why We Have Bonds!
I was at a party this weekend and as I have come to expect, I received the following question more than once: so, what do you think is going to happen in the market this week? I gave my usual professional answer: I have absolutely no idea! Of course the folks that I were speaking with all had their thoughts/opinions but we all agreed that none of us truly did know what today would bring. Due to this uncertainty, most investors should not have all of their investment capital invested in stocks. A healthy dose of bonds, and even cash, is good idea.
As we all know, yields on bonds have been quite low for a very long time. As I am writing this, the yield on the 10-year Treasury bond is at 2.00%. (Earlier today it was closer to 1.90%) That means that the government will provide you a 2% return on your money over a 10-year period if you are willing to loan them money. Sound like a good deal? I did not think so.
But maybe it is a good deal. Last week we saw the stock market lose more than 1,000 points in the last three trading days of the week and this morning the market was down another 1,000 points in the first 10 minutes before rebounding. Right about now a 2% return sounds pretty good!
But, the rational side of our brain knows better. The current market volatility is scary right now but once it calms down the market usually moves higher. And over the long-term we can usually expect better than a 2% return on our money. Of course we may need to go through more volatility (i.e. lower markets) until we get to those calmer markets and higher returns. In the mean time though, having bonds in our portfolio helps to minimize that volatility.
In the 2008-2009 stock market downturn, equity markets lost more than 50% of their value. Hence, if you were 100% in stocks, you lost 50%! But, if you had a 60% stock/40% bond portfolio then in theory you should only have been down about 30%. I do not know about you, but I was certainly glad I had some of my portfolio in bonds despite their lower yields.
Where do we go from here? First, as all of our clients know, if you do not have a written and signed Investment Policy Statement, you need one! You actually needed one before this volatility, but if you are reading this and do not have one, it is time to take some action. An Investment Policy Statement clearly details your asset allocation and under what conditions you will make changes to your portfolio. If you are making changes without this, then I'm sorry to say you are probably making mistakes that are avoidable.
Second, as our clients know, when markets go down, they usually present rebalancing opportunities. If you have an Investment Policy Statement and you decide to allocate 8% of your money to Emerging Markets for example, you should probably be looking to see if you need to add to this asset class to bring it back to its target. This is one example of an asset class that has not done well lately, but the response is not to sell an asset class AFTER it has lost value. Rather it is time to buy into this asset class because it is on sale!
Third, if you are spending any appreciable time watching the news or following the financial markets online then my advice is to stop. Go back to work, go back to your retirement activities, go back to doing something other than paying attention to these markets. The financial press has a mission to sell advertising space. The only way for them to do that is to capitalize on volatile markets by trying to scare us. When we are scared, we usually make poor decisions. Hence, turn off the telly, step away from the computer, and ignore the media. They are not your friend.
Getting back to original premise of this post: bonds are your friends. Especially in times like these. They help to minimize the volatility of your portfolio and they provide a means of rebalancing when markets trend lower.
If you would like to discuss your Investment Policy Statement, or if you need one, please feel free to reach out.