The Dollar’s Fortune and Foreign Stocks

Chart of the Week: Don’t Bail on Bonds

Stocks falling 20% or so in a calendar year isn’t fun, but it’s also something experienced investors expect. Bonds falling 13%? That’s…not what we expect.

Vanguard offers a series of static stock/bond allocation funds in its LifeStrategy series. As you can see below, its most conservative option, LifeStrategy Income (20% stocks and 80% bonds), has declined 13.4% so far this year—steeper than its 10.5% drop in 2008. With just a few days left in the year, even a rally probably won’t change the story of bonds’ poor protections in 2022.

Many who are dismayed by the bond market’s fall will point a finger at the Federal Reserve’s interest-rate hikes, but the real culprit is inflation. Rising prices are the enemy of a fixed-income investor, so when inflation goes from muted to the highest level in decades, we shouldn’t be surprised that fixed-income securities have posted their worst performance in a generation.

Sources: Vanguard, Adviser.

With inflation trending down and bond funds paying out more income than before, now is not the time to abandon a well-built, balanced portfolio. Stay the course.

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bond fundsbondsChart of the WeekJeff DeMaso