Weren't bonds supposed to go the opposite direction?

[StockBeard]

I've been pouring some of my investments into bonds, in line with my aversion to risk.
So far this year I'm negative on both my bond ETFs and my stock ETFs. Are other people seeing this? Should I just get rid of bonds entirely?

[Tyler]

Stocks and bonds are pretty uncorrelated but they are not perfectly negatively correlated.  They do move together sometimes.   It will reverse eventually but will definitely happen again, and one should not expect stocks and bonds to always move in the opposite direction.  A year of them both losing money is a poor reason to abandon bonds, IMHO.  Your asset allocation requires a more holistic outlook. 

[LAGuy]

Bonds are essentially as high as they can go given the Fed's funds rate of zero. Maybe if they announce another round of QE you might possibly eek a little more blood from that turnip. But, the Fed has been talking about raising rates. That would be "bad" for current bonds as they won't be worth as much as future bonds with their presumably higher yields. Nope, don't expect to make any money in bonds these days. Holding bonds is all about risk aversion right now. If you're lucky they'll at least mark time with inflation. Frankly, if you've been in bonds all this year, you made the "right" call compared to say, stocks which are down a fair amount at this time.

[StockBeard]

Frankly, if you've been in bonds all this year, you made the "right" call compared to say, stocks which are down a fair amount at this time.

Yup, they've clearly decreased less, but they still decreased, which was my "surprise". If they're going to go down no matter what, I might as well reduce my bond ratio for my next rebalance...

[LAGuy]

Yup, they've clearly decreased less, but they still decreased, which was my "surprise". If they're going to go down no matter what, I might as well reduce my bond ratio for my next rebalance...

Well, they may not go down no matter what! Maybe they'll just mark time. That mostly depends on how confident you are the Fed will get off of zero interest rates. Japan has been trying to do that for decades! Clearly, a lot of people have their doubts or else they wouldn't still be buying up bonds. Personally, I'm in the camp that the Fed is either not going to be able to raise, or they'll only manage 0.25% at best over the next year or two. That would be bullish for bonds. But, I still don't want to own them as I don't see the possibility of EVER making any money on them. I invest to make money. As a price, I'm willing to lose money. That's why I'm all stocks. If you don't want to risk losing [more] money, keep some of your money in bonds. People that have some of their money in bonds this year have seen better returns (less negative) than I have. But yeah, sometimes the world catches on fire and EVERYTHING goes down...then your only protection is to be short or hedged. That's just way above my pay grade.

[Posthumane]

Tyler is on the money. The correlation between different asset classes is never fixed at a perfect -1. If there were such asset classes then making money would be dead simple. If you really want to reduce the volatility of your portfolio then you need to have multiple asset classes with very weak correlations such as stocks, bonds/treasuries, gold, commodities, etc. A good example is Harry Browne's permanent portfolio. A better example is Tyler's own Golden Butterfly.

[NorCal]

+1 to Tyler's comment.

My personal philosophy on bonds isn't shared by many on this board, but it might be a useful food for thought.

When it comes to stocks, you get great diversification by buying a simple index fund.  However, this should be balanced by low correlation or negative correlation assets like bonds, foreign stocks, real estate, etc.

When it comes to a bond funds ability to be negatively correlated, it makes a huge difference what type of bond you're buying.  Most simple bond funds hold simple bonds with 2-10 year maturities from a variety of government and high-credit corporations.  These funds typically don't move a lot in either direction regardless of what stocks do.  While this isn't a bad thing, you can improve your bond portfolio in a variety of ways, depending on what you're trying to accomplish. 

If you want to reduce your correlation to the market, stick some money in long-term treasuries.  These are highly sensitive to interest rate changes, have a strong negative correlation to stocks, are highly volatile, and generally yield more than your typical broad bond fund.  Don't put too much money here, but it can be an improved diversifyer.

In another direction, you could invest in high-yield bonds.  These are actually somewhat correlated to the stock market, but they are not very sensitive to interest rate changes, and higher yields help smooth the volatility a bit.  Again, I wouldn't put a lot of money here, but it would be a good diversifyer to your normal bond portfolio.

Other options include foreign bonds (including emerging market bonds), preferred shares (I prefer these in taxable portfolios over high-yield bonds), and Muni bonds. 

I personally believe most sizable portfolios (maybe $100K+) should have some element of these bond funds in there.  Remember, unlike stock funds that hold a little bit of everything, your broad bond fund will likely exclude most of these bond types completely from their holdings.

[sirdoug007]

Josh Brown just commented on this in his recent article in Forbes: http://fortune.com/2015/09/30/next-bear-market/?curator=thereformedbroker&utm_source=thereformedbroker

What if stocks and bonds sell off at the same time?

The nightmare scenario for the investor who has prudently divided up her assets among stocks and bonds is sitting by helplessly as they both sell off at the same time. This situation would temporarily negate the benefits of diversification and rebalancing. And right now, with both bonds and stocks selling at historically high valuations, this is a distinct possibility.

In fact, it’s happened before, although only very rarely. In just three of the past 88 years, bonds and stocks have had negative returns at the same time (1931, 1941, and 1969). In those three years, investors lost money in both the S&P 500 and the 10-year Treasury note. In other words, during just 3.4% of all annual periods for which we have reliable data, a diversified portfolio didn’t work. To which the rational person would say, “So what.” Considering that you are most likely investing for a period of greater than one year, this is a potential risk that is not worth obsessing over.

Investors should not expect their bond portfolios to protect them from every bad month in the stock market. The benefits of diversification among the two asset classes typically take between one to three years to show up. Consider that the monthly return for a portfolio of government and corporate bonds is actually much lower on average during a month when stocks fall. This is highly counterintuitive, but it doesn’t really matter when looking at the longer term. The fact is that this same portfolio of bonds has returned an average of 7.9% for all rolling three-year periods during which stocks have fallen by 10% to 20%. These are the times when the diversification benefit truly shines through.

[CanuckExpat]

My thinking on the subject is that a bad year in the bond market is still going to seem like a picnic compared to a bad day in the stock market.

My asset allocation is set such that it helps me sleep at night with that in mind.

[Indexer]

Bonds have a tendency to go up when stocks go down because people want to own something safe when there is uncertainty. Government bonds = safe.

Even if you move your money into a money market fund... check the real underlying holdings... you guessed it, government bonds.

Example: 2008 VBTLX(total bond market) is up 5.15%.

Still 2008 as an example.
Looking at long term bonds(VBLTX) were up 8.64%.
Lets focus just on treasuries, long term treasuries(VUSUX) were up..... 22.69%! Then it was down 11.93% in 2009, and down 12.94% in 2013.
Even intermediate term treasuries(VFIUX) were up 13.49% in 2008.

I don't normally do a lot with long term bonds just because they can be as volatile as stocks. They move different directions a lot, but it is still a lot of up and down. I would personally just be heavier in stocks for growth and then use intermediate term bonds(or a mix of short/intermediate/long) for stability depending on the goal.

All the above funds were up in the third quarter by the way. So government bonds, especially longer term tend to be a good hedge against a falling stock market. Corporate bonds, especially high yield corporate bonds, represent loans to corporations so they can move in the same direction as the corporate stocks.

[mrpercentage]

As we stand
-Stocks just took a hit creating higher yields
-Bonds have taken a hit because of the end of ZERP
-Bonds have other dangers looming like default from some of the oils and mining.
-Bond will take more hits when the interest rate actually rises as people dump old bonds for new higher yielding ones.


Bonds are not the place to be. 2% is joke. Do you invest in the S&P500 for its attractive yield? The S&P will give you 2%. The high yield bonds are catering to the losers of the oil battle and other high risk operations. Think about that before you leave your money there. Better to be in a 1% bank account then your money is guaranteed, or stage it in a money market until the trend in interest rates is known. You can lose 7% of principal for every point basis raised on trade value. Unfortunately unless you are buying bonds directly you can not control what other people do in a fund. Managers will have to trade for redemptions and this will affect your principal.

Just my opinion. I prefer high yielding stocks. At least their principal can go up. All money I need anytime soon I keep in cash