If you follow the markets at all, you know that both stocks and bonds have decreased in value since the beginning of the year. Rick has written a series of articles for Forbes about exactly that. The links are below.
Most investment pundits stress the importance of diversification in your portfolio. Is that still a good idea? Hint: It is.
Recently, Rick Miller appeared as a guest of Chris Arnold on NPR’s Weekend Edition Sunday to discuss that issue. The show presents the example of Deborah McDaniel, a retiree with a diversified portfolio, who has seen a nearly 25% drop in her retirement fund. “Maybe I need to find a job again,” Deborah says. She’s 69 years old and says looking for work is “not something I relish doing.”
Normally, when stocks fall, bonds rise. The Fed will often lower interest rates to help bonds rise. With inflation at its highest rate in 40 years, the Fed raised rates and that caused bonds to dip.
“The reason that bonds drop in value is that interest rates rise,” says Rick.
Chris came up with a simple way to describe the bond market. He referred to bonds as turtles — the slow and steady investments meant to offset the volatility of stocks (the hares). In the fable, the tortoise (or turtle), and his perseverance, wins the race.
Rick picked up on the turtle analogy and (forgive us) “ran with it”.
Your bonds are still OK. Rick says, “Your turtles have numbers on their backs.” The numbers correspond to their interest rates, in this case, 2%. When interest rates rise, new bonds (turtles) are issued at higher rates, and you may have trouble unloading your 2% turtles (bonds).
They’re still paying 2% per year, but now they’re competing with new, 5% turtles. As Rick puts it, “…my turtle is still a nice turtle. It’s a really cute turtle. But if I want to sell it, I’m going to have to give buyers a discount.”
That explains why bonds have lost value. Still, if you hang on to them, your turtles will continue to make the same interest payments.
“Your turtle’s not dying, your turtle’s not even sick,” says Rick. He also says that Deborah’s bonds should still be producing the same return. It gets better. Rick says if rates stay high, your 2% bonds will mature and higher rate bonds will replace them, generating more money for you.
If you do have to sell bonds to pay bills, you’ll take a hit, but if you can avoid selling them now, you’ll make more in the future.
Rick has a message for investors. “Don’t panic and sell all your bonds. Just stick with your financial plan.”
Would you like to learn more about stocks and bonds? Here are some related articles by Rick Miller and Frank Napolitano. You can also view a recording of our recent webinar, “How can stocks and bonds both be down?”
What Should You Do About Bond Price Declines?
How Does Inflation Affect Bond Returns?
Why Are Stocks and Bonds Both Down?
Why Are Stocks and Bonds Both Down? Part II
Photo by Zdeněk Macháček on Unsplash