Yikes.
Guess I should be used to it. Every time the market drops, the flood gates open with questions and concerns.
Still it surprises me. After all, I have written extensively about bear markets…
- Mr. Bear
- Taking advantage of Mr. Bear
- Buying into the market right before a Bear
- Mr. Market’s Wild Ride
- Nightmare on Wall Street
- Why you should NOT be in the stock market
…to name a few.
The message is always the same:
This too shall pass. Stay on the path.
I’ve even provided a guest post with an investment strategy that avoids stocks altogether for those who simply never want to deal with Mr. Bear:
This time, most of the concern is around what’s up with bonds falling along with stocks. So in this post, I’ll respond to some of the typical questions around those I have gotten so far.
Then, if you’d like, Ask Me Anything in the comments and over the next couple of days I’ll do my best to answer. After that, not so much. (Dec 3: We’ve reached the “not so much” stage on questions.)*
My thanks to my pal Go Curry Cracker for this idea which I got from his recent Ask Me Anything post.
And let’s get started.
“Is it different this time?”
No. And yes.
No in that every market drop runs its course and then recovers. Some fall deeper than others. Some take longer to recover than others. Now, like every time in the past there is no way to know.
As always, my advice is to stay the course and keep buying as you were before. A bear market is a gift that allows you to buy shares on sale.
Everybody makes money when the market is rising. But what determines whether it will make you wealthy or leave you bleeding on the side of the road is what you do during the times it is collapsing.
And yes in that what triggers each market drop is always something different. Last time it was covid. This time it is being triggered by inflation. Unless you are old like me and were investing in the 70s and early 80s, you have no personal experience with inflation. As you are learning, it is ugly and it hurts everyone.
This is why the Fed is aggressively raising interest rates, which is exactly what they should be doing in my opinion. My fear is that they will bow to political pressure and ease up too soon. But, so far so good.
This political pressure comes because raising rates causes short-term pain and we are very likely headed into a recession. This is why the stock market is falling, it recognizes that the talk of a “soft landing” is a fantasy.
Why are my bonds dropping in value? I thought bonds were supposed to go up when stocks fall, or at least hold steady.
Ordinarily, you’d be right. But there is nothing ordinary about inflation. It messes with everything, including bonds.
Given inflation, there is nothing surprising happening with bonds. In response to inflation the Fed has been raising interest rates. When interest rates rise, the price of existing bonds drops as newer, higher yielding bonds are issued.
If you want to know more about how these things work, here is…
The good news is that, if you hold your bonds in VBTLX (or a similar broad-based, low cost total bond market index fund) as I recommend, eventually the newer, higher-yielding bonds will make their way into your portfolio and the interest rate it pays will also rise.
“Why are my bonds doing worse than my stocks?”
“However I find myself having to sell stocks to buy bonds at the present to reach my target allocation.”
“The bonds that are supposed to be the stability pillar of any portfolio are doing worse than stocks.”
Recently, VTSAX (stocks) is down ~25% and VBTLX (bonds) is down ~15% YTD.
If your bonds are down more than your stocks, you have been chasing performance with you bond allocation. I advise against this:
The Bond Experiment: Return to VBTLX
“…are we just seeing the end of the allocation principle theory?”
Of course not. Here’s why:
In fact, even with all the noise in the markets this year, my allocation has only moved a couple of percent more to the bond side. Hardly enough to bother rebalancing.
As I have written before, we consider rebalancing each year on my wife’s birthday. I say “consider” because the allocation rarely diverges enough to bother.
“JL is quiet on this matter of bonds for some reason.”
Because JL has already written about it extensively. (See the links above)
OK, to calm your nerves I’ll leave you with this…
…and on to the comments.
Ask me anything!
*Dec 3
OK all…
As I said above in the post: “Then, if you’d like, Ask Me Anything in the comments and over the next couple of days I’ll do my best to answer. After that, not so much.” That was on Oct 21st and it’s now Dec 3rd. So, we’ve reached the “After that, not so much” time.
Feel free to continue to post your questions and while I won’t be able to respond I encourage long time readers to weigh in with their thoughts.
Thanks for all the questions!
