Stocks & Bonds Usually Go Different Directions
Last week I mentioned that bonds typically lose value on an annualized basis once every 5 or 6 years. The week before that I mentioned that investors are going to experience losses on their stock portfolios approximately once every four years.
It now seems I need to add the important caveat that losing years for stocks and bonds don’t typically happen at the same time. Since 1929 there had only been two years where both bonds and stocks lost money on an annualized basis at the same time. 2022 is shaping up to be the third.
Successful investing isn’t about avoiding these temporary losses. Those are going to happen and should be embraced. Asset classes that never experience short-term losses have very little long-term upside. Instead, successful investing is simply about controlling risk and never being forced to sell an asset when it is down. For retirees drawing income from their portfolio, this means living off the bonds when stocks are down, living off the stocks when bonds are down, and in the rare occasion that both are down, tapping the smallest, safest, portion of the portfolio which should be the money market accounts, CDs and short Treasuries. When the other assets eventually rebound, you can then sell what has gone up and buy back what was spent down.
The strategy is frustratingly simple but also nearly impossible to implement without patience and a long-term commitment.
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