Are Bonds Sinking?
Traditionally, intermediate and long-term bond funds have been used as stabilizing components in retirement portfolios. There is good reason for this since they rarely, if ever, have had substantial drawdowns compared to stocks. In addition, intermediate and long-term bond funds have tended to move up when the stock market is moving down … until this year. The current economic environment of rising interest rates paired with inflation (not to mention a pandemic recovery and major war) has not only created rough waters in the equities market (stocks) but also in the intermediate and long-term bond markets. In fact, in 2022, despite the S&P 500 being down more than 20% YTD on November 7th, many long-term bond funds are performing even worse. Vanguard’s long-term bond fund (BLV), which we have liked for years — especially in down markets, is down 34% YTD on November 7th! Bond performance in 2022 has been abysmal and has put many retirement portfolios into dreadful waters. It is clear to me that in 2022 bonds are “taking on water”.
WILL THIS CONTINUE?
It’s hard to say exactly, but there remain many reasons for concern, specifically the likely continuation of rising interest rates coupled with a stubborn inflationary trend.
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WHAT CAN BE DONE?
A very wise man once said, “Do not enter into an investment without an exit plan.” If you are in a situation where your portfolio has already been significantly damaged by this year’s double-whammy of market and bond declines, I would recommend contacting an investment advisor before making any knee-jerk decisions. Take time to find an advisor who has a solid strategy for navigating market downturns and has alternatives to bonds. Know that remaining invested and riding through the downturn is often recommended, but it’s not the only way to thoughtfully navigate difficult conditions. The closer you are to retirement, the less you can afford to wait out a protracted down market. Riding through a down market can consume your most precious asset: TIME. I believe that your financial success in retirement will largely be determined by how well you navigate down markets and taxes during retirement.