Do Bonds Always Rise When Stock Markets Drop?

question

 

Here’s a question that one of my readers asked.

 

Hi Andrew

I have a balanced portfolio of Etfs 40/60-bond/stock and I am not concerned whether the market is currently up or down as I am leaving my money to grow over 10 yrs. However, in my perhaps ignorance, I always thought when equities were down bonds were up-but I see now both my stocks and bonds are low-in fact my bonds -global-have consistently this year made big losses and the stocks gone up and down? Just asking for some information so I understand better.

Jen

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Hi Jen,

Usually, when stocks fall hard, bonds tend to rise.  This doesn’t happen every time.  But most of the time it does.  The current market downturn has been no exception.  You may be measuring the success of your bonds and stocks in different currencies.  Always compare apples to apples.  If you own a bond index that’s priced in U.S. dollars, you must compare that with a stock index priced in U.S. dollars.  If you have a global stock index priced in British pounds, compare that with a global bond index that’s priced in pounds as well.

 

Let me show you some examples.

 

Below, you can see a chart representing the Canadian stock index and the Canadian bond index, measured in Canadian dollars. 

Note how Canadian stocks (the red line) have dropped nearly 10 percent during the past 3 months.  On the other hand, both the short term government bond index (blue line) and the broad Canadian bond market index (green line) have risen slightly during the stock market’s drop.

jenq-img1_vsb-xic-xbb

 

Here’s another example.  This time, we measure apples to apples in USD. 

The blue line is Vanguard’s S&P 500 index of U.S. stocks.  Over the past 3 months, it has fallen 8 percent.  In contrast, Vanguard’s total bond market index has slightly risen.

jenq-img2_vfinx-vbmfx

 

Let’s compare UK stocks and bonds, measured in British pounds. 

The brown line represents British stocks over the past 3 months.  They have fallen nearly 12 percent.  However, the UK government bond index has risen 3 percent. If you include interest gained from those bonds (the 3 percent gain is just a price gain) then you’re looking at a gain of roughly 3.5 percent overall for UK bonds.

jenq-img3_vgovl-vukel

 

Now let me show you an illusion—and an exception.

Over the past 3 months, the international stock market, measured in USD, has fallen more than 10 percent. 

International bonds (the red line) haven’t dropped.  If, however, you measured this in Euros both indexes would be up.  The U.S. dollar has gained 12.9 percent, compared to the Euro over the past year.  If you are European, but you are measuring these index funds in USD, breathe a sign of relief.  During the past 3 months, you have made (in Euros) about 12 percent on your international bonds and you’ve broken even with your international stock market index.

Chart below, measured in USD

 

jenq-img4_vea-ishg

Now let’s look at the past 12 months. 

Measured in U.S. dollars, Vanguard’s first world international index (VEA) has dropped 14.1 percent.  The ishares International Bond market index (ISHG) has fallen 14 percent.

Measure the same results in Euros and you’ll find that both the international stock and bond indexes have dropped just a few percent.

USD’s 12-Month Gain Against The Euro

jenq-img5_usd-eur

 and

 

jenq-img6_vea-vt-ishg

When stocks drop, bonds usually rise (or they drop much less).  It doesn’t happen always.  But over your lifetime, it will be the general rule—far more often than not.





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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5 Responses

  1. Andy says:

    Hi Andrew,

    I am in the process of converting my cash ISA (UK version of TFSA) into a stocks ISA. I’ll likely pick up iShares IGLS for my bond component. I’ll be buying the UK, global and bonds components all this week, lump sum.

    I’m sold on the methodology you espouse and planned a split of 70/30 stocks/bonds as I’m in my mid 30s. However we live in unprecedented times. The bank of England base rate is at an all time low of 0.5%.

    My question to you is this. Is there a case for modifying your bonds/stocks ratio to favour stocks at this time? There is so little remaining room for interest rates to fall and when they do rise then bond prices will fall. Would it be a good strategy to start at say 90/10 or 80/20 and then adjust back to 70/30 as interest rates pick up in the next few years.

    Many thanks for your reply, and your books!

    Andy H

    • Hi Andy,

      Every historical period of time is an “unprecedented time.” You name the decade, I can show you something unprecedented about it. My advice? Don’t speculate. Stick to the program of rebalancing a diversified portfolio.

      Cheers,
      Andrew

  2. Andy says:

    Perhaps my choice of words was unfortunate, no intention to sensationalise it. Just an observation that interest rates have almost nowhere to go downwards and wondering if its correct to assess that bonds will fall as interest rates rise?

    • Andy,

      If interest rates rise, and bond prices fall, wouldn’t that be a good thing for you? I’m just 45. It would be a great thing for me, because I still have an income, and I could buy bonds at a much lower price, with the income I will earn over many future years. You might be much older than me. If that’s the case, well….as they say in golf, “Every putt makes someone happy.”

  3. Denis says:

    Hello Andrew,
    With your book you opened a new world to me, I’m following your advice and I’m converting all I have in ETFs.
    I have a few concerns about my possible portfolio:
    I’ m 39 Italian living in the UK, but I maybe moving in the future and absolutely no idea where I will retire maybe italy, maybe Thailand or who knows.
    I own a house I’m renting in Italy, so: fixed income, can it be considered like an italian bond? If yes I’d invest a smaller portion of my portfolio in bonds, let’s say 25% (Instead of 40%), but here the real question:
    In your book you suggest to go for iShare 1-3yr government bonds (IBGS) for European investors, looking at the index composition it is completly made by Italian and Spanish bonds only, isn’t it too risky? Would you suggest to go for something more international? or eventually mix IBGS with Gilts and US Tresury bonds?

    Thanks!

    D.

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