The stock market (measured by the S&P 500) closed essentially at a breakeven level since January 1st. The big news is the slide it took over the last several days, reacting to the craziness in Greece, but the most important issue is what we can learn from these gyrations.
The chart above compares stocks (S&P 500 in blue) against long-term bonds (in red) and short-term bonds (in green) over one full year.
Note how well long-term bonds did in the first part of this 12 month period. Because of all the volatility in stocks, many people have been tempted to flee to bonds, and that impulse was reinforced for much of the year.
But long-term bonds have their own form of volatility, reacting to perceptions of interest rate moves. Those perceptions drove long-term bonds down in the last half of the year period.
For quite a bit of the last twelve months it would have seemed that bonds were a safe place to be to escape the volatility and insecurity of stocks. Despite stock market gyrations, note that stocks have closed up 4.48% over the last twelve months, while long-term bonds ultimately lost money.
Short-term bonds just putzed around and didn’t do much, neither falling nor growing. Over longer periods, they would perform similarly. You may not lose anything, but you won’t get ahead either.
This simple chart encompassing just one year demonstrates the power of diversification. You can’t figure out when bonds will do well and when stocks will do poorly. In fact, it’s often the exact opposite of what the headlines suggest.
Headlines have screamed that the world is unstable, stocks are volatile and bonds offer a safe haven. Well, the safe haven lost money, and the volatile stocks generated an almost 5% rate of return.
Diversification properly implemented will help you attain your goals with confidence. If you’d like to schedule some time to have us conduct an objective review of your portfolio, please contact us here. We always provide 100% objective advice you can trust.