Assets in Isolation: Long Term Bonds

Long term bonds are hot now. Posting about 20% gains so far this year.

Yep, they’ve gone up a lot. Same thing happened in 2008. In 2009 LT bonds dove in price by -22% as yields climbed from the lows of January back to the upper 4% range by the summer. Bummer. If you read what so many people say this should have been devastating. A 22% loss is just crushing, right?

No, it wasn’t.

The stock market recovered sharply that year posting around 30% gains. This effectively wiped out all of the losses in the LT bonds. If you rebalanced in 2008 taking LT bond profits and buying stocks and then taking some stock profits in 2009 to buy back into LT bonds when they fell in price you are doing perfectly fine.

In fact you’re doing better than fine because those LT bond prices have climbed again while the market this year is floating around 0%. This doesn’t even include the interest payments you’re getting. Heck, if you had just done absolutely nothing the past two years but held on for dear life you still posted small gains through the worst bear market in decades and the sharp recovery:

Portfolio 1: 60% Stocks and 40% Total Bond Market

Portfolio 2: 50% Stocks and 50% Long Term Bonds

Portfolio 3: Permanent Portfolio 25% Stocks/Bonds/Cash/Gold

Portfolio 4: 100% stocks in the Total Stock Market


CAGR 2008-2010 YTD

60/40: -1.80% / Year

50/50: +3.25% / Year

Permanent Portfolio: +5.96% / Year

100% Stocks: -7.33% / Year

For a starting balance of $10000 in 2008 you ended up with in 2010 YTD:

60/40: $9469

50/50: $11007

Permanent Portfolio: $11666

100% Stocks: $7960

The above assumes rebalancing happened each year. If you didn’t rebalance then your results were less, but still a positive return for the 50/50 portfolio and about the same for the Permanent Portfolio. Losses in the other portfolios were still present to a greater or same degree. But these returns happened even with massive losses in stocks in 2008 and massive losses in LT bonds in 2009. It’s not magic, it’s diversification in action.

It is a bad idea to look at assets in isolation. Only total portfolio value matters. Investors do not win every year in every investment. Anyone who says so is a liar. The point of having a wide diversification is so you can ride up with the winners and be protected against severe losses in the losers. If we had listened to the pundits this year about staying out of LT bonds we would have missed the gains. If we had listened to the pundits in 2009 about avoiding stocks we would have missed those gains. I see a pattern here.

Ignore the pundits and stick to the plan.

Overall, the direction of the Permanent Portfolio is heading the right way (growing each year) so there is no point in fretting over what an asset may or may not do going forward. It’s a complete waste of time even thinking about this stuff because nobody can tell what is going to happen. Stick to the rebalancing bands and buy and sell when needed. Simple.

Looking at assets in isolation is a good way to get headlines, but a terrible way to run a portfolio.

Craig Rowland

I own the place.

  • http://retirementinvestingtoday.blogspot.com/ RetirementInvestingToday

    I really like the statement “Ignore the pundits and stick to the plan”. Goes against the herd mentality so could even be considered contrarian I guess.