Bond fund diversification

[owenmia]

I read somewhere that during one of the corrections (I believe 2008) that bonds went up 5% as stocks went down.

If this is the case, then wouldn’t this be a major advantage of bond funds over individual bonds in that they automatically go up when stocks go down?

[Phineas J. Whoopee]

I read somewhere that during one of the corrections (I believe 2008) that bonds went up 5% as stocks went down.

If this is the case, then wouldn’t this be a major advantage of bond funds over individual bonds in that they automatically go up when stocks go down?

It has nothing to do with bond funds vs. individually-held bonds, and anyhow they don't reliably behave that way.

Intermediate-term investment-grade bonds and stocks have shown themselves to be uncorrelated, that is, if one goes down the other may go up, stay the same, or go down. To reliably move in the opposite direction would be negative correlation, which we do not observe. Of course, uncorrelated assets might move in opposite directions in one instance, and not in another.

A mutual fund is nothing more nor less than a vehicle by which to own its underlying holdings. If one directly held the same portfolio of bonds as a fund, and managed them the same way, the results would be the same.

Individual bond market values change. That's the underlying reason bond fund net asset values change.

Funds vs. individual bonds do not make a difference, and there is no automatic negative correlation.

PJW

[owenmia]

Ok, too bad they are not negatively correlated. That would be nice.

Thanks for the info.

[goodenyou]

You can read about long term treasuries adding more diversification to a stock/bond portfolio. There have been several posts on the virtues of adding these investment vehicles for those looking for more diversification to a stock portfolio.

[Doc]

You can read about long term treasuries adding more diversification to a stock/bond portfolio. There have been several posts on the virtues of adding these investment vehicles for those looking for more diversification to a stock portfolio.

Intermediate-term investment-grade bonds and stocks have shown themselves to be uncorrelated, that is, if one goes down the other may go up, stay the same, or go down. To reliably move in the opposite direction would be negative correlation, which we do not observe. Of course, uncorrelated assets might move in opposite directions in one instance, and not in another

These seemingly contradicting comments can possibly be explained by a difference in the bond type: long T's vs. intermediate investment grade. Also important is long term lack of correlation vs. short term negative correlation during stock market stress.

Of course if you won't buy stocks when the Dow tanks the negative correlation won't do you any good.

[goodenyou]

You can read about long term treasuries adding more diversification to a stock/bond portfolio. There have been several posts on the virtues of adding these investment vehicles for those looking for more diversification to a stock portfolio.

Intermediate-term investment-grade bonds and stocks have shown themselves to be uncorrelated, that is, if one goes down the other may go up, stay the same, or go down. To reliably move in the opposite direction would be negative correlation, which we do not observe. Of course, uncorrelated assets might move in opposite directions in one instance, and not in another

These seemingly contradicting comments can possibly be explained by a difference in the bond type: long T's vs. intermediate investment grade. Also important is long term lack of correlation vs. short term negative correlation during stock market stress.

Of course if you won't buy stocks when the Dow tanks the negative correlation won't do you any good.

And sometimes there is no safety to fly to.

[Tyler Aspect]

I read somewhere that during one of the corrections (I believe 2008) that bonds went up 5% as stocks went down.

If this is the case, then wouldn’t this be a major advantage of bond funds over individual bonds in that they automatically go up when stocks go down?

Bond funds are more diversified compared to individual bonds.

Normally in a correction bond pricing could hold stable or go up slightly. If there is high inflation coupled to a correction then bond pricing could go down.

[grabiner]

I read somewhere that during one of the corrections (I believe 2008) that bonds went up 5% as stocks went down.

This depends on the type of bonds. Treasuries went up in October 2008 when the stock market crashed; corporate bonds lost a bit. Therefore, you needed less in Treasuries than in corporate bonds to get the same risk reduction in that crash; this is fair compensation for the lower yields on Treasuries.

If this is the case, then wouldn’t this be a major advantage of bond funds over individual bonds in that they automatically go up when stocks go down?

Both bond funds and individual bonds change in value in the same way. If you buy an individual bond for $1000 and falling rates cause the bond market to rise 5%, your net worth has increased by $50. You will lose that $50 in bond value if you hold that bond to maturity, but the reason your bond is worth $1050 and not the $1000 par is that it is now paying more in coupons than the market interest rate, so you still get the benefit. (A mutual fund might sell the bond for $1050 and buy a new bond for $1050 with the then-current rate; this bond would pay less in coupons but would keep its value, which is just as good.)

[Bluce]

I read somewhere that during one of the corrections (I believe 2008) that bonds went up 5% as stocks went down.

This depends on the type of bonds. Treasuries went up in October 2008 when the stock market crashed; corporate bonds lost a bit. Therefore, you needed less in Treasuries than in corporate bonds to get the same risk reduction in that crash; this is fair compensation for the lower yields on Treasuries.

As I recall reading, after the smoke cleared 10 years ago: During that bear the overall bond market was down about 10%, but Treasuries (all? Long only?) were up a few percent.

But I'm old and bordering on senility -- so that may not be right.

[grabiner]

I read somewhere that during one of the corrections (I believe 2008) that bonds went up 5% as stocks went down.

This depends on the type of bonds. Treasuries went up in October 2008 when the stock market crashed; corporate bonds lost a bit. Therefore, you needed less in Treasuries than in corporate bonds to get the same risk reduction in that crash; this is fair compensation for the lower yields on Treasuries.

As I recall reading, after the smoke cleared 10 years ago: During that bear the overall bond market was down about 10%, but Treasuries (all? Long only?) were up a few percent.

Treasuries were up, corporates down, and Total Bond Market Index, which holds both, was close to flat.