Today I address your question, “When equities go down, do bonds go up?” This is an excellent question many investors have when determining asset allocation for their portfolios. To answer, I developed a three-part series to address this question in the fairest manner possible.
First, it is impossible to put all equities in one group and all bonds in another. The next step is to identify the top bond funds and chart their performance during the 2000 and 2007 sell off. During the downturns, I crunch the numbers to see if these bond funds went up when equities (stocks) went down.
To eliminate bias, I researched the following top bond funds in terms of size and available data: 1. PIMCO Total Return Fund (PTTRX); 2. Vanguard Total Bond Market Index Fund (VBMFX); 3. Templeton Global Bond Fund (TPINX); 4. Vanguard Inflation-Protected-Securities (VIPSX); 5. American Funds Bond Fund of America (ABNDX). Some funds are front loaded with large commissions and hefty expenses, while others have zero commissions and very low expense ratios. Although some funds require a hefty minimum initial investment, all can be purchased through many online brokerages with a low minimum investment.
Investors have zero business buying these funds or any security until they research the holdings, commission, and fee structures. A half of a percent per year in extra fees can make a difference of thousands of dollars over the years--dollars that can go into your pocket instead of Wall Street’s.
In today’s chart, you can see the performance of these bond funds in terms of the market (S&P 500) since the current equity bull market started in March of 2009 to date. The market has returned over 175%, while the bond funds have been laggards. Keep in mind that this is not an apples-to-apples comparison but is designed to show that, if you would have had these funds in your asset allocation, your overall performance would be less than just being in equities. Hence, the question: Is it worth having bond funds during bull runs?
Next week, you will see how these bond funds performed during the 2000 downturn. The results may be surprising!
Plan your work, work your plan, and share your harvest!
David O. England
davidoengland.com
