I received quite a few phone calls and emails from investors who are still nervous about the bond market. After reading the headlines in financial publications, web sites, and listening to the talking heads in the financial media – who can blame them. The following are examples of four actual recent headlines.
“Get out of bonds now before the bubble bursts”
“There is going to be a meltdown,”
“It’s time to get out of bonds.”
“The bond implosion has officially begun”
“The worst of the bond-market bust is yet to come”
A bond bear market is different than a bear market in stocks Contrary to what the financial media would like you to believe, there has been no comparison between bear markets for stocks and bonds. Since 1929, stocks lost money in 24 of the last 83 years, with a worst calendar year loss of 43.8 percent in 1931. During this same period, the bond market experienced five losing years. The worst year was an 8.9 percent loss in 1969. The Benefits of Bonds Even though bonds may not provide the steady returns investors have been used to, bonds are an important component of a well-diversified portfolio. The reason is that stocks and bonds are not highly correlated; that is, they tend to move independently of each other. Sometimes stock returns may be up while bond returns are down. When stock prices are falling, investors looking for a safer place to move their money often buy bonds. This has historically caused bond prices to rise. The accompanying chart shows that during the thirteen investment periods since the Great Depression in which stocks suffered double-digit losses, bonds provided double-digit gains.
The importance of bonds, to any portfolio for any age investor, is about reducing portfolio volatility and minimizing the damage that bear markets inflict on retirement portfolios. While bonds may provide a lower return than in recent past, they still offer diversification benefits.
|Sep 1929 – Jul 1932||-86%||+14%|
|Mar 1937 – Apr 1942||-60%||+6%|
|May 1946 – Jun 1949||-30%||+7%|
|Dec 1961 – Jun 1962||-28%||+8%|
|Feb 1966 – Oct 1966||-22%||+5%|
|Jan 1973 – Oct 1974||-48%||+9%|
|Nov 1980 – Aug 1982||-17%||+5%|
|Jul 1990 – Oct 1990||-19%||+15%|
|Apr 2000 – Mar 2003||-43%||+37%|
|Oct 2007 – Mar 2009||-57%||+9%|
|Apr 2011 – Aug 2011||-12%||+7%|
Stocks: Dow Jones Index from 1929 to 1972; S&P 500 Index from 1973 – 2012.
Bonds: Intermediate Term U.S. Corporate / Treasury Bonds