Over the last few months, I’ve heard a lot of concerns about bond performance in 2022. Many students have been left asking questions like, “Why hold bonds if they are down in the same year stocks are down?”
Some relevant figures here, using data available as of 19 December of 2022, and looking at year-to-date returns:
At the heart of the question is a supposition to the effect of, “In a year when equities are down, fixed income should be level or increasing.”
First, this assumes that all investing takes place in even calendar year allocations. Just because the calendar starts on January 1st and ends on December 31st, it doesn’t mean our investment patterns follow that same path. We all know that investing is a multi-year endeavour and that performance should only be measured over years and decades. So for starters, let’s not get too focused on the short-term. The blue line below is the equity index and the white line is the bond index:
Comparing the two lines, we see limited correlation between the two for the year. Equities started the year relatively strong, while fixed income had more of a prolonged slide. Both experienced their lows for the year over the summer, and both have had some recovery since then, but timed differently. Equities have recovered on a somewhat erratic basis, while bonds have seen the stable type of slow climb we would expect.
Are we holding fixed income to perfectly offset negative returns on the equity side? How granular do we want to get here? Should we check our investments every day to confirm that our fixed income returns and our equity returns are perfectly negative correlated? I don’t think anybody wants to end up there.
While there might be some temptation to move away from fixed income allocations in portfolios, let’s remember that many investors are holding fixed income to keep a portfolio from dropping to an extent that the investor leaves at the worst possible time. Looking at the returns cited earlier in this post, we can see that fixed income has been more stable than equity. Only with Canadian returns, where equity has recovered somewhat in the latter half of the year, do we see similar numbers on the equity side to the fixed income side.
I would suggest this year provides a valuable opportunity to remind our clients (and ourselves) of the purpose of fixed income in the portfolio, and the overall lessons of investing:
• Fixed income is there to offset the volatility of equities.
• We should not be checking our portfolio values more often than absolutely necessary.
• The stuff we read in the news should not send us to check our portfolio values.
I hope these are timely reminders as we push into 2023. Happy New Year to all our readers, and thank you for reading!
Source: All charts, indices, and data used in this article are from S&P Dow Jones.