There’s an old adage in financial planning that when stocks rise, bonds fall. When stocks fall, bonds rise.
Only half of this is true.
Stocks and bond prices move independently. It’s not always the case that bond returns are negative in years when stock returns are positive. (In fact, in most years both stocks and bonds are positive.)
However, it is true that in years with negative stock market returns bond returns are typically positive.
2022 was a unique year in which both stocks and bonds fell. Because of this a lot of us fall victim to recency bias; we’ve had a number of conversations with clients in which they had the impression that bonds no longer help buoy portfolios during down markets.
I came across this slide from Ben Carlson of Rithholz Wealth Management that I find helpful. I know I don’t have a monopoly on good ideas so I’m happy to share good material, even if it’s not my own.
Post-Great Depression the S&P 500 has had 26 negative years. Of these 26, only 4 of them saw negative bond returns too.
In 22 out of 26 years holding bonds in your portfolio helped reduce the dip in your portfolio, and probably reduced money-stress too.
(Side comment - in almost 95 years the S&P 500 has been positive over 70% of the time. Pretty good track record if you ask me.)
This is the main reason we advocate for some bond weight in our retiree portfolios. If you’re relying on your investments for income, bonds help dampen the fluctuations of the market and offer a steadier investing experience.
Sure, some investors may not need to hold any bonds at all. Maybe they have sufficient cash flow to not need income from their portfolio. They may be young and not need the money for 20+ years so they want to maximize growth. Or they’re simply aggressive investors and don’t want to hold bonds.
These are all valid…but for retirees we still believe bonds have a place in the portfolio.
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