Last year around this time I published an article, Potential Pitfalls In Bond Investing. What followed was the worst year for bonds in decades. I’d like to think I timed the article perfectly, but it was more a coincidence than anything. I watched over the years as the bond market composition changed dramatically, particularly the average maturity of bonds increasing by over 50% from 4 years to 6+ years in the past decade.

This resulted in a painful year for passive bond owners this year as long-term bonds got hammered. I wanted to reshare the post because the principles still apply as you consider how to invest in bonds going forward…

A client recently asked, “Who is buying in this market?” It’s a great, simple question. If you turn on the news, it sure sounds like everyone is selling. But that is not the case. SPY, one of the most widely held ETFs has an average trading daily volume of 86 million shares - which equates to approximately $32 Billion trading hands every day.

For each seller represented here, there is a buyer. Even on a really bad day in the stock market, the fact alone that the market doesn’t fall to $0 means that there has to be buyers.  So, who are the buyers?

What drives stock market returns? Economic activity, politics, wars, viruses, inflation, interest rates...the list could go on. Over the long run, the answer is simply two things - (1) company earnings and (2) how much investors are willing to pay for those earnings.  

With everything that has gone on this year, some bright news is that corporate earnings have remained fairly stable, with 5.1% growth through the end of September.  What’s changed is how much investors are willing to pay for those earnings…

There has been nowhere to hide this year. Year-to-date (9/30/2022), the S&P 500 is down 25% and the bond aggregate is down a whopping 15%. It’s the worst-performing period for a balanced portfolio since 1931!

There are some risks in life that are permanent. If you live in a hurricane-prone area and don’t have hurricane insurance, you are taking a risk that could lead to a permanent loss. That is a real risk.

The financial advising world often talks about investment risk in the context of market fluctuations up and down. We categorize investors as risk-averse if they are unwilling to deal with bouts of volatility. What we are measuring is the perceived risk – the risk that values may temporarily decline in value.

When we are in the middle of a bear market, sitting on our hands can be unbearable. This is also the time when you’ll start hearing about market timing strategies. I was recently listening to a market analyst describe timing the market as a simple supply and demand equation.

It sounds simple enough, but I know the data does not support this. So, I decided to stress test it. I back-tested the following strategy – one that follows a popular strategy following recent market trends…