Do bonds generally go up when the stock market crashes?

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investing1012
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Do bonds generally go up when the stock market crashes?

Post by investing1012 » Fri Jan 12, 2018 4:36 pm

Do bonds generally go up when the stock market crashes?

Grt2bOutdoors
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Re: Do bonds generally go up when the stock market crashes?

Post by Grt2bOutdoors » Fri Jan 12, 2018 4:39 pm

investing1012 wrote:
Fri Jan 12, 2018 4:36 pm
Do bonds generally go up when the stock market crashes?
No. Not all bonds are equal. Depends what kind you are holding. Ask junk bond holders how they made out in 2008.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

investing1012
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Re: Do bonds generally go up when the stock market crashes?

Post by investing1012 » Fri Jan 12, 2018 4:41 pm

Specifically vanguards total bond index fund

WhiteMaxima
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Re: Do bonds generally go up when the stock market crashes?

Post by WhiteMaxima » Fri Jan 12, 2018 4:42 pm

not necessary.

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Pajamas
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Re: Do bonds generally go up when the stock market crashes?

Post by Pajamas » Fri Jan 12, 2018 4:43 pm

There is often a "flight to safety" when equities lose value rapidly, but as mentioned above, there are bonds and then there are bonds.

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corn18
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Re: Do bonds generally go up when the stock market crashes?

Post by corn18 » Fri Jan 12, 2018 4:44 pm

Maybe?

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alex_686
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Re: Do bonds generally go up when the stock market crashes?

Post by alex_686 » Fri Jan 12, 2018 4:47 pm

There is a low positive correlation between stock and bond returns -around .4 to .6 depending on which time period you use.

There is also a causal effect between bonds and stocks. A stock's value is its discounted Free Cash Flow to Equity (FCFE). When yields go down (i.e. bond prices go up), the discount rate (i.e. interest rate) the value of future cash flows (dividends) increases, so P/E ratios increase. This is the world that we live in now, low bond yields and high PE ratios. Historically speaking, when factoring in bond rates, the adjusted stock market PE ratio is not that high. I mean, it is high but explainable.

staythecourse
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Re: Do bonds generally go up when the stock market crashes?

Post by staythecourse » Fri Jan 12, 2018 4:54 pm

Even if they do there are other factors that matter as well. One, is the magnitude of the movement when stocks tank. If they only go up 5% when the market goes down 30% you can see not much help. Second, is the weighted average that is dedicated to bonds vs. stocks. If you have 5% in bonds and 95% in stocks that 5% in bonds is not going to do much no matter the magnitude of movement.

So in the end if you are holding bonds just to insulate for a stock drop it is not as effective as you may hope unless one is 20 some % in LT U.S. treasuries. But since, stocks go up 60-70% of the time there is a considerable drag on returns dedicating 20% to bonds for the accumulator.

In my opinion, the BEST diversifier to a high equity portfolio is not bonds, but a stable job and no need for liquidity. This give TIME for recovery.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: Do bonds generally go up when the stock market crashes?

Post by Caduceus » Fri Jan 12, 2018 4:55 pm

You can't generalize, because the stock market can crash for very different reasons, and there are many different types of bonds.

WhiteMaxima
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Re: Do bonds generally go up when the stock market crashes?

Post by WhiteMaxima » Fri Jan 12, 2018 5:02 pm

When company goes under, the stock holder is behind bond holder to get anything. In many cases, the bond can be default and investor can get penny for the dollar or even nothing. In this case, FDIC insured cash deposit is the king. In the very extreme case, cash become worthless, the gold bar is the king. Yes bond can lose value but slower than stock.
Last edited by WhiteMaxima on Fri Jan 12, 2018 5:13 pm, edited 2 times in total.

dbr
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Re: Do bonds generally go up when the stock market crashes?

Post by dbr » Fri Jan 12, 2018 5:03 pm

It is very important to recognize that even if bonds move counter to stocks, the size of that movement is much less. Please do not think that holding bonds offsets the volatility of stocks. The only thing that does that is holding less in stocks.

SimplicityNow
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Re: Do bonds generally go up when the stock market crashes?

Post by SimplicityNow » Fri Jan 12, 2018 5:10 pm

If we are speaking of a investment grade bond such as Vanguard Total Bond Market Index.... While it is true that bonds usually do not increase the same amount that stock decrease during a crash they also do not decrease as much or perhaps not at all during that same crash.

What they will do is cushion the blow to your portfolio. So if you're asset allocation is 50%/50% stocks/bonds and the stock market fund plummets 40% and your bond market index fund remains unchanged, your portfolio would only lose 20% of its value.
Last edited by SimplicityNow on Fri Jan 12, 2018 5:11 pm, edited 1 time in total.

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Phineas J. Whoopee
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Re: Do bonds generally go up when the stock market crashes?

Post by Phineas J. Whoopee » Fri Jan 12, 2018 5:11 pm

Here's an earlier thread I started on the subject:

et tu, Vanguard? Stock/Bond zig-zag myth

Reviewing it may help with your question.

PJW

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JPH
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Re: Do bonds generally go up when the stock market crashes?

Post by JPH » Fri Jan 12, 2018 5:22 pm

alex_686 wrote:
Fri Jan 12, 2018 4:47 pm
There is a low positive correlation between stock and bond returns -around .4 to .6 depending on which time period you use.
I wouldn't call a correlation of .4 to .6 low; it's really pretty large. Definitely large enough to base a decision on if it is true.
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MP123
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Re: Do bonds generally go up when the stock market crashes?

Post by MP123 » Fri Jan 12, 2018 5:25 pm

Most importantly, bond issuers have to pay you interest regardless of what's happening with the stock market. They could default in extreme cases but that would wipe out shareholders stock first.

That helps to smooth your income stream during a downturn.

alex_686
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Re: Do bonds generally go up when the stock market crashes?

Post by alex_686 » Fri Jan 12, 2018 5:45 pm

JPH wrote:
Fri Jan 12, 2018 5:22 pm
alex_686 wrote:
Fri Jan 12, 2018 4:47 pm
There is a low positive correlation between stock and bond returns -around .4 to .6 depending on which time period you use.
I wouldn't call a correlation of .4 to .6 low; it's really pretty large. Definitely large enough to base a decision on if it is true.
2 things. First, there is context. It terms of asset correlations it is very low. Anything lower than .8 is considered low. Assets prices tend to have high correlations. Second, I would be careful about it "being large enough to base a decision on". Those numbers are pretty mushy, with debatable assumptions, and then to go 1 during times of crisis.

DrGoogle2017
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Re: Do bonds generally go up when the stock market crashes?

Post by DrGoogle2017 » Fri Jan 12, 2018 6:23 pm

I think they lose less than stocks.

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Phineas J. Whoopee
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Re: Do bonds generally go up when the stock market crashes?

Post by Phineas J. Whoopee » Fri Jan 12, 2018 6:32 pm

DrGoogle2017 wrote:
Fri Jan 12, 2018 6:23 pm
I think they lose less than stocks.
Yes, that's correct. Investment-grade bonds fluctuate less than common stocks, so they lose less and gain less, and the bond losses and gains have a near-zero correlation with stock price fluctuations. That doesn't mean they move in the opposite direction. It means there is no relationship at all.

If stocks go up, investment-grade bonds could go up, stay about the same, or go down.

If stocks go down, investment-grade bonds could go up, stay about the same, or go down.

If stocks stay about the same, investment-grade bonds could go up, stay about the same, or go down.

That's what a near-zero correlation implies.

PJW

investing1012
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Re: Do bonds generally go up when the stock market crashes?

Post by investing1012 » Fri Jan 12, 2018 6:32 pm

Main reason i ask is if they’re inversely correlated it would soften the blow of a crash more. However if they are not inversely correlated it may make more sense to invest in something else other than bonds with higher yields.

investing1012
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Re: Do bonds generally go up when the stock market crashes?

Post by investing1012 » Fri Jan 12, 2018 6:33 pm

What is the long term average nominal yield of the total bond market index fund ?

dbr
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Re: Do bonds generally go up when the stock market crashes?

Post by dbr » Fri Jan 12, 2018 6:33 pm

investing1012 wrote:
Fri Jan 12, 2018 6:32 pm
Main reason i ask is if they’re inversely correlated it would soften the blow of a crash more. However if they are not inversely correlated it may make more sense to invest in something else other than bonds with higher yields.
That depends on what you are trying to do.

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Re: Do bonds generally go up when the stock market crashes?

Post by RRAAYY3 » Fri Jan 12, 2018 6:34 pm

investing1012 wrote:
Fri Jan 12, 2018 6:32 pm
Main reason i ask is if they’re inversely correlated it would soften the blow of a crash more. However if they are not inversely correlated it may make more sense to invest in something else other than bonds with higher yields.
Yes, cash

That you then buy more stocks with as everyone else cries in the corner

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Phineas J. Whoopee
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Re: Do bonds generally go up when the stock market crashes?

Post by Phineas J. Whoopee » Fri Jan 12, 2018 6:37 pm

RRAAYY3 wrote:
Fri Jan 12, 2018 6:34 pm
investing1012 wrote:
Fri Jan 12, 2018 6:32 pm
Main reason i ask is if they’re inversely correlated it would soften the blow of a crash more. However if they are not inversely correlated it may make more sense to invest in something else other than bonds with higher yields.
Yes, cash

That you then buy more stocks with as everyone else cries in the corner
If I may, keeping assets targeted for stocks out of the stock market in hopes of lower prices later is very likely to reduce returns, because all the time stocks are going up those assets aren't.

I bring it up because it's a widely-held idea that, as far as I can tell, ignores the opportunity cost. Ignoring any type of cost can impair financial decision making.

PJW

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Re: Do bonds generally go up when the stock market crashes?

Post by RRAAYY3 » Fri Jan 12, 2018 6:43 pm

Phineas J. Whoopee wrote:
Fri Jan 12, 2018 6:37 pm
RRAAYY3 wrote:
Fri Jan 12, 2018 6:34 pm
investing1012 wrote:
Fri Jan 12, 2018 6:32 pm
Main reason i ask is if they’re inversely correlated it would soften the blow of a crash more. However if they are not inversely correlated it may make more sense to invest in something else other than bonds with higher yields.
Yes, cash

That you then buy more stocks with as everyone else cries in the corner
If I may, keeping assets targeted for stocks out of the stock market in hopes of lower prices later is very likely to reduce returns, because all the time stocks are going up those assets aren't.

I bring it up because it's a widely-held idea that, as far as I can tell, ignores the opportunity cost. Ignoring any type of cost can impair financial decision making.

PJW
I’m 100% equity aside from my e-fund ... and will continue to feed my taxable account monthly 1/3 of my net pay and then max out my 401K starting in June ... I had a large cash position but I just used half of that to pay off my car in full

Paid off Honda and low cost index funds - I’ve gone full Boglehead in less than 1 year !

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Re: Do bonds generally go up when the stock market crashes?

Post by ruralavalon » Fri Jan 12, 2018 7:06 pm

investing1012 wrote:
Fri Jan 12, 2018 4:41 pm
Specifically vanguards total bond index fund
Vanguard Total Bond Market Index Fund went up in 2008 when the real estate bubble burst, and also went up in 2000 when the dotcom bubble burst.
Last edited by ruralavalon on Fri Jan 12, 2018 7:10 pm, edited 1 time in total.
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Phineas J. Whoopee
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Re: Do bonds generally go up when the stock market crashes?

Post by Phineas J. Whoopee » Fri Jan 12, 2018 7:12 pm

RRAAYY3 wrote:
Fri Jan 12, 2018 6:43 pm
...
I’m 100% equity aside from my e-fund ... and will continue to feed my taxable account monthly 1/3 of my net pay and then max out my 401K starting in June ... I had a large cash position but I just used half of that to pay off my car in full

Paid off Honda and low cost index funds - I’ve gone full Boglehead in less than 1 year !
Good for you. Congratulations. Your story doesn't change the nature of opportunity cost, nor the wisdom of advising another to ignore it.
PJW

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nisiprius
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Re: Do bonds generally go up when the stock market crashes?

Post by nisiprius » Fri Jan 12, 2018 7:22 pm

a) The Vanguard Total Bond Market Index Fund basically stayed flat during 2008-2009. Which seemed pretty good. But it was flat, it didn't go up.

b) There is a feeling, and I give some credence, to the idea that Treasuries go up a bit when the stock market crash--but if we are talking about the kind of intermediate-term bonds that are appropriate for retirement-savings portfolios, they don't go up much.

It's hard to define exactly what to measure, but roughly, we're talking about
--the Vanguard Intermediate-Term Treasury fund (VFITX, blue) going up by +12%,
--the Vanguard Total Bond Market Index Fund (VBMFX, orange) staying level,
--while the Vanguard Total Stock Market Index Fund (VTSMX, green) going down by -52%.

Source

Image

I mean, big deal. Even if you'd elected to go all Treasuries for bonds (meaning probably a bit lower return going forward, safety doesn't come for free), the gain in bonds wouldn't have done much to offset the loss in stocks unless you had a portfolio of, say, 15/85 stocks/bonds. (Let's not start talking about leverage, because then you get into issues like the ups and the downs not happening at exactly the same time...)

In my thinking, bonds are for stability, not for any stock-fluctuation-cancelling magic.
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Re: Do bonds generally go up when the stock market crashes?

Post by aristotelian » Fri Jan 12, 2018 7:33 pm

nisiprius wrote:
Fri Jan 12, 2018 7:22 pm
a) The Vanguard Total Bond Market Index Fund basically stayed flat during 2008-2009. Which seemed pretty good. But it was flat, it didn't go up.

b) There is a feeling, and I give some credence, to the idea that Treasuries go up a bit when the stock market crash--but if we are talking about the kind of intermediate-term bonds that are appropriate for retirement-savings portfolios, they don't go up much.

It's hard to define exactly what to measure, but roughly, we're talking about
--the Vanguard Intermediate-Term Treasury fund (VFITX, blue) going up by +12%,
--the Vanguard Total Bond Market Index Fund (VBMFX, orange) staying level,
--while the Vanguard Total Stock Market Index Fund (VTSMX, green) going down by -52%.

Source

Image

I mean, big deal. Even if you'd elected to go all Treasuries for bonds (meaning probably a bit lower return going forward, safety doesn't come for free), the gain in bonds wouldn't have done much to offset the loss in stocks unless you had a portfolio of, say, 15/85 stocks/bonds. (Let's not start talking about leverage, because then you get into issues like the ups and the downs not happening at exactly the same time...)

In my thinking, bonds are for stability, not for any stock-fluctuation-cancelling magic.
Long Term Treasury did +22% in 2008. I would call that a big deal when stocks did -37%.

Bonds certainly reduce portfolio volatility in part due to non-correlation. A 70/30 portfolio reduces worst drawdown by 30% with a reasonable risk-adjusted return.

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