Stocks and Bonds are Fundamentally Unknowable
I’m excited about writing my column this week. Why? Because I have a smoking gun.
I often wax poetic about how nobody knows when stocks and bonds are going to go up or down. Nobody knows.
Individuals fight me on this from time to time, because the 24/7 Financial News Machine makes it sound like the opposite is true. They make it sound like there are smart guys in New York City who wear nice ties, have modest haircuts, and important sounding job titles- who have some supernatural ability to predict the directions of the markets.
Case in point: Everybody knows that when interest rates go up, bond values go down. This is Investing 101, right? If the federal government is issuing 10-year bonds at 2% and then they suddenly begin to issue 10-year bonds at 3%, who would want your crummy old bonds? Nobody. They can just buy a shiny new bond at a higher interest rate. Sure, they are willing to buy your bonds from you…at a discount.
For years, we have been hearing the following statements : “Interest rates are at historic lows. They have to go up at some point. As interest rates begin to rise again, it will be a nightmare for bond holders. Their ‘safe’ bond portfolios will get whacked. Investing in bonds may not be very attractive.”
Well, it’s happening. The Federal Reserve has raised interest rates twice this year; from .75% to 1.00% and then again from 1.00% to 1.25%.
All those poor bond holders! Devastation! Financial ruin!
Hold on. Hold on. Let’s take a deep breath.
The Barclays U.S. Aggregate Bond Index is a tool used to track the overall bond market in the U.S. So, how has the index performed this year? Has it lost 10%? 20%? 50%?!?!
As of September 5th, 2017, the year-to-date return of the bond index is +2.74%.
Wait. How is that possible? How is it possible that interest rates are going up AND bonds are increasing in value?
I have no idea. And neither does anyone else.
Which brings me back to my original point: Stocks and bonds are fundamentally unknowable.
But I don’t want this to scare you. I want this to be liberating. This means than you don’t need to pay attention to the pundits, because they are trying to predict the unpredictable.
Just rest in the fact that bonds, over the past 40 years, have done remarkably well. I could actually go back 200 years to paint a similar picture but for now, check this out:
Barclay’s U.S. Aggregate Bond Index
Average Annual Return
|1975-1985||+10.5% average per year|
|1985-1995||+9.63% average per year|
|1995-2005||+6.16% average per year|
|2005-2015||+4.51% average per year|
Quite frankly, if you “only “get 4.51% of your bond portfolio between now and the end of your life, I’m guessing you would be thrilled.
Really, this is AMAZING news. Maybe you don’t need to worry about all this stuff after all.
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Past performance is never a guarantee of future results. Individuals cannot investment in an unmanaged index. Investments with a higher rate of return carry a higher risk. Actual results will vary.
The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings.
The value of fixed-income securities may be affected by changing interest rates and changes in credit ratings of the securities.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. Indexes are unmanaged portfolios and individuals cannot invest directly in an index. Actual results will vary.
This communication is for informational purposes only and nothing herein should be construed as a solicitation, recommendation or an offer to buy or sell any securities or product, and does not constitute legal or tax advice. The information contained herein has been obtained from sources believed to be reliable but we do not guarantee accuracy or completeness. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel.