Nowadays, it seems that everyone has access to a stock market app, they see the headlines, hear the news and start to feel uncertain. Things are happening quickly and the volatility can feel pretty dramatic. Investors want to know, where can they hide? What should they do? We have compiled those top of mind questions that we are getting from investors to try and give some perspective.
The first question that we get from people regularly is “why are my bonds down?” Colin and Greg review this topic in-depth on our April 6th Episode of The CM Group’s Free Lunch Podcast “What do you mean my bonds are down” but lets go over the basics. Mathematically, as interest rates go up bonds with a coupon rate attached to them, which might be lower than the current rates, go down in value. This happens because you have something that is paying a lower coupon than you could get if you purchased an equivalent bond today. For simplicity sake we like to compare this to a teeter totter; interest rates go up, bond prices go down and vice versa. During the pandemic interest rates were lowered and bond prices went up during those times, now we are seeing rates rise as various government bodies try to combat inflation. The same principal can be applied to a bond fund or a bond pool as these are a collection of individual bonds managed together. Each of those individual bonds has a specific maturity date, owning a fund is no different than holding a whole bunch of individual bonds.
When we talk about rising interest rates and how that affects bond prices, one key thing to remember is that rising interest rates won't impact all bonds the same. Let’s look at FTSE TMX Canada Universe Bond Index Series, as this is the most widely used performance indicator of marketable government and corporate bonds for Canada. Currently, the Universe Bond Index is down about 7% year to date, but if you only look at the short term bonds, the short term bond index is down 3% year to date. Likewise, you will see differences with corporate bonds and high yield bonds, because every bond is different. They've got a different maturity date, a different coupon rate attached to them, and those factors can help determine how a bond reacts to rising interest rates.
Investors look at the markets and the volatility and they ask “where do I put my money?” Can't put it into bonds, they're down, can't put it into stocks, they're down too. My friends broker told them to sell their bonds and buy stocks. Should I do that? The answer to this is not as straightforward as you may think as it will very likely depend on your strategic asset allocation. Simply, what is your goal in terms of how much of your assets you want to have invested in stocks, in bonds and in cash or short term investments? If you plan to, for example, have 60% of your money invested in stocks and you already have 60% in stocks, then selling bonds and buying more stocks may not make sense as it puts your risk level at a much higher rate. Making your portfolio riskier because something is down does not make a lot of sense. Note, that just because an asset has lower risk or lower volatility does not mean it cannot go down. It means that over long periods of time, the expected return is lower and the expected volatility is lower.
So, what should you do? Should you buy or own stocks? Yes. Should you buy or own bonds? Yes, but you should do so while focusing on your asset allocation. If you are feeling the strain, now may be a good time to ask, is my asset allocation actually appropriate for my goals? Think of it like running a lifeboat drill, in the cruise industry these drills are performed to reduce panic if a ship is in trouble. Kind of like the current state of the markets, they have had signs of trouble. Did you abandon ship?
Here’s the drill
Start with your Plan. What are your goals? Where are you trying to go? How long do you have to get there? What is your tolerance for risk?
Think of your “What Ifs.”
What if…the stock market goes down, the bond market goes down, the dollar goes down (this list of options is truly endless) ...how will I react?
Review your Plan. Does it need adjusting? Is it time to talk to an expert about the available options?
Understanding how you will react to different events will help you stay on course. If the current market has someone exiting their investments then the real question is where those investments or that risk tolerance and asset allocation actually correct for that person?
What should you do to prepare for the inevitable declines? Nothing, except to remind yourself that markets go up, markets go down, generally they trend up overtime and regardless of the direction, any investment decisions you make should be done so with your financial plan as the key driver – not emotions.
Consider this a lifeboat drill. The seas have been calm and friendly but at some point the waters will get rough. And when they do, don’t worry, now you’ll be prepared to stay the course and arrive at your destination safely.
For more top of mind questions and there answers tune in to our April 27th Episode of The CM Group’s Free Lunch Podcast “My stocks are down, my bonds are down…what do I do?”
Stay happy, stay safe, stay well!
The CM Group