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Percentage Off High: Stocks vs Bonds

Posted by kdadmin on March 2nd, 2017.

Percentage Off High: Stocks vs Bonds

We’ve all seen the charts that show how the stock market seems to have gone up like a rocket since the 1970’s, albeit with many catastrophes. It seems to imply that the best investment strategy is putting all your money into the stock market, never touching it, and letting it ride. (Of course those who promote this strategy always pick ideal entry and exit points, and never take the devastating effects of the 1980’s double digit inflation into account. Oops. Myopia strikes again.)

Now, this can be a great strategy. Unless you ever want to spend your money …

Spending Your Money

If you actually want to spend your money, the market crash of 2000 probably bothered you because you would have had 35% less money to spend. And the 2008 crash would have provided 53% less money to spend. Now, imagine that you have a large, unexpected expense, or maybe even lose your job. How happy are you going to be if that happens at the bottom of a market crash? Which is probably when it will, given Murphy’s Law, and the unemployment curve.

For the vast majority of people, who ultimately want to spend their money, the point of investing is to have money when they need it, and to be able to do the things they want with it. This will almost never correspond with a stock market top. So, smart money avoids catastrophic loss. And tries to preserve its ability to Live the Life You Love.

Percentage Off High

In reality, day to day investing life in the market looks a lot more like the chart above. Most of the time, everything and everyone talks about the market’s most recent high. Sure, it’s sophomoric. But it’s reality. The chart above shows the Dow Jones Industrial Average since January 1, 1977. It calculates how the index performed from its recent high point. It also shows how a corporate bond fund performed; to give you a clearer sense of stocks vs bonds.

Now, what is immediately obvious?

  1. The best time to buy stocks is when they are FURTHEST from their most recent high. This often corresponds with the recessions (grey bars).
  2. The best time to own bonds is when stocks are CLOSEST to their most recent high. Because stocks usually seems to drop sharply next.
  3. Where is the stock market now? At a record high. Why do I probably own bonds?

Of course, the goal is always to ride the stock market up as high as possible. But when the stock market has gone beyond its fundamentals into territory far beyond historical levels or support, the old adage, “pigs get fed and hogs get slaughtered,” provides useful perspective.

Why Do You Care?

Because the notion that you could simply buy any index and not be swayed by severe short term losses, and/or your need for ready cash, is stupid. Unless you’re a billionaire. You simply won’t be able to do it. Strut all you want. It’s the peacocks who fold first.

And why would you even want to? If you have a significant amount ofmoney, chances are you didn’t get it by being stupid. Smart money sees that a certain sector of the market is dropping, or likely to drop, sells out, buys something safe, waits out the crash, and then buys back in. The point of a defensive (bond heavy) investment portfolio isn’t to make huge short term returns. It’s to keep as much money as possible available and secure so that you have a lot more of it to buy heavy into crashed sector (like stocks)at a severe discount at the end of the next correction or recession. Remember? Buy low, sell high.


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