Stocks and Bonds Decoupled

[TromboneAl]

A complaint about the recent downturn is that not only did stocks do poorly, but bonds also declined.

However, looking at the chart below, it seems that that is no longer the case (that is, since the beginning of the year, bonds have recovered well). Am I reading things correctly?

 

[DblDoc]

If your bonds were low risk, gov't secured they did fine as the world "fled to quality". A group at the Bogleheads are big proponents of taking risk with your equity and use only the safest (and most boring) bonds for your bond portion. This would include short and intermediate term gov't bonds + TIPS. Avoid long term as you are not sufficiently compensated for interest rate risk. Yes your yield will be lower but as this current decline has shown chasing yield on your bonds is not without its own risk...

DD

 

[dex]

Shouldn't the chart be of bonds and stocks to see if there is a decoupling? The attached chart looks like Money Market and Bonds.

 

[MasterBlaster]

Shouldn't the chart be of bonds and stocks to see if there is a decoupling? The attached chart looks like Money Market and Bonds.

yes thats the chart.

However the total bond index has a maturity of only 5 or 6 years or so. The chart I would like to see is stocks versus long (corporate) bonds.

 

[clifp]

yes thats the chart.

However the total bond index has a maturity of only 5 or 6 years or so. The chart I would like to see is stocks versus long (corporate) bonds.

Is this what you are looking for?

 

[LOL!]

Well, not all bonds declined. The Vanguard Intermediate-term Treasury fund averaged 9.4% a year for the last 3 years and was up about 8% over the last year. This is what DblDoc said. Of course TIPS are another beast and have lost about 3% over the last 12 months. Contrary to popular opinion, TIPS are not safe.

 

[Ed_The_Gypsy]

Contrary to popular opinion, TIPS are not safe.

So I see.

 

[mathjak107]

my TLT long term treasury bond fund was up 28% last year almost offsetting my equity losses... in fact coupled with gld gold etf i was actully up 1% after the 38% equity loss

 

[Gone4Good]

Contrary to popular opinion, TIPS are not safe.

They have to be held to maturity to be safe. They have wicked interest rate risk otherwise.

 

[Gone4Good]

Bonds haven't really decoupled . . . but then again, I'm not exactly sure they ever "coupled". They seem to be behaving like they always have. Treasuries have moved inversely with risky assets (like stocks) and risky bonds have moved in the same direction as other risky assets. The thing that was a bit different with this bear market was the magnitude of the sell off in higher quality credit. But recently, the credit markets have been healing, so bonds have been on a nice little run lately. But if you hadn't noticed, stocks are off their lows by 25% or so, too. So over the past two months risky assets have outperformed less risky assets. Those securities that were beaten down the most (bank stocks, anyone?) have done the best.

 

[clifp]

I was surprised to see that high yield and investment grade bonds have virtually the same performance over the last 5 years. My Vanguard high yield fund is up more than 10% since I bought last Nov.

 

[audreyh1]

Some AA tutorials recommend that you own very high quality, short term bonds and cash in the fixed income portion of your AA as these are the least correlated with equities. In the extreme, this would mean NO corporates, only govt-backed bonds.

If you had done this, then you would have only seen the equity portion of your portfolio drop. Your bond portion would have rallied big time.

Audrey

 

[FIREd]

IIRC, Swedroe suggests owning only short/intermediate bonds of the highest quality (treasuries, agencies and AA/AAA rated munis) in order to compensate for equity risk and to lower portfolio volatility. No high yield and no corporates because credit risk and equity risk tend to show up concomitantly.

 

[audreyh1]

Another reason to keep to the short end of the time spectrum on bonds is that they are less sensitive to inflation than long bonds. Over the long haul this results in a better portfolio total return.

Audrey

P.S. This information is from the Frank Armstrong site tutorial on asset allocation.

 

[TromboneAl]

Shouldn't the chart be of bonds and stocks to see if there is a decoupling? The attached chart looks like Money Market and Bonds.

Yes. I took the stock fund off because the drop was so big that the detail in the bond price movement was lost.