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One Year Later, Bonds Are the Winner: How the Market Works

Posted by kdadmin on May 22nd, 2016.

One Year Later, Bonds Are the Winner:  How the Market Works

Roy Rogers once said that he was more concerned about the return OF his money, than the return ON his money. Take a look at the chart above, it covers the last year.

Which investments did you own? Which do you think my clients owned?

One Year Later, Bonds Are the Winner: How the Market Works

Today is the one year anniversary of the stock market’s all time market high. Within days, we had dumped our entire stock position, began loading up on intermediate bonds and long term bonds, and published an article about it. You can find that here: And We’re Out of Stocks.

Yes, we called it right. And yes, our clients made money last year, even though the stock market didn’t. And they did it by taking far less risk than the stock market warrants.

But what about the road ahead?

Stocks are Still Overvalued:

One year later, the Federal Reserve has:

  1. Raised interest rates (only by 0.25%).
  2. Been extremely cautious about upsetting the market’s apple cart.
  3. But still believes the stock market is significantly overvalued.
  4. Has withdrawn a lot of money from the money supply by not purchasing new bonds when older ones mature.
  5. Remained on pace for another rate increase in June.

NONE of these things is good for rising stock market prices over the long term, and most of them cause sensationalized volatility in the day to day stock prices.

It’s Not Worth the Risk.

The chart above only reflects change in price. But, the chart below adds dividends and interest into the picture. Notice the red line. This is AGG, an aggregate bond ETF. It has earned a very steady 3.45% return with very little volatility. Compared to the stock market’s repeated 13%+ swings and return of- 1.41% for the year.

Now, if you could make 3.45% with very little risk, in an extremely volatile market, why on earth would you take the huge risk in the stock market? Remember, the return OF your money is as important as the return ON your money.

Your eye is probably drawn to the huge, 11.6% return in the long term bond investment. While long term bonds can be a great investment in a volatile and declining stock market, they can be extremely volatile themselves. So, while we do have a portion of our money in these types of investments, it’s small, and buying in at the right time is critical.

One Year Later, Bonds Are the Winner: How the Market Works Total Return

Making Money Now

While it is still possible to make money in a down or flat market, as I’ve illustrated here, the first step is to set your sights lower. This protects you from making rash decisions to chase past performance. Instead of trying to hit a 10% return when the stock market has gone down, maybe try hitting a 4% return, while avoiding a 20% loss.

Poor stock market performance won’t last forever. Having plenty of money in cash and other defensive investments can set you up for great opportunities when the market tanks and others are selling out at the bottom.

This is what we did in January, and it paid off handsomely. You can learn about that here.

We’re going to try to do it again. Would you like to join us?


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