Turns out bonds are much, much “riskier” than expected this year, doesn’t it?
When something does anything as unexpected as bonds have the risk of permanent capital loss increases. The investor caught unawares might panic sell / start doubting their advisor or engage in other wealth destroying behaviour.
At TCFP we hammer home that equities go up and down all the time and, every so often, they go down big before recovering. Therefore, our clients know what to expect, are well prepared for it and less likely to do anything daft.
Who says the same to their clients about bonds? Bonds are supposed to be “safe”. Bonds are supposed to go up when equities go down. Bonds are not meant to do what they have spent a good amount of 2022 doing.
Equity investors are getting what is expected. Nothing extreme or unusual has been going on, just the usual 3–5-year hiatus, which come and goes and then values recover.
Bond investors are having a nightmare year, a true outlier. Bonds are down almost as much as equities, but where is the light at the end of the tunnel? Where is the redemption for being a bond investor? This was not supposed to happen.
We are in unknown territory with bonds – suddenly that makes them very much “riskier” than we imagined.
What to do?
Stick it out? If you can tolerate this behaviour from bonds, why can’t you tolerate it from equities? You get a much better overall return for doing so.
Or do you sell your bonds and wait for things to “settle down”? What does that look like? How will you know?
Or perhaps you move the money to cash (getting hosed by inflation), property (getting hosed by interest rates) or “alternatives” (the last refuge of the scoundrel)?
What is left? Mainstream equities? But you have spent years eschewing them, haven’t you? They are “high risk”. Why abandon your principles now? Because they have been misguided all along?
Looking forward 3-5-10 years I have increasing confidence that being the owner of the great and good companies around the world will result in inflation beating returns. The longer you are an owner of these companies the more confident I get.
For bonds, the outlook is bleak in comparison. To me at least.
Which is the “riskier” investment as we sit here at the end of 2022? Which will give you more heartache, and which more joy?
It is time we all realigned our thinking. Let’s start with not letting anyone, ever convincing you that bonds are less “risky”, it simply ain’t so.