We all have different memories from childhood P.E. class. Mine is the exercise of publicly picking teams. I was never the first picked, nor was I the last. I’m comfortable saying I was above-average. Studies have shown that this process can have a deep emotional impact on students individually. Could fixed income investors feel the same after the market sell-off to end 2018?
It never fails. Every time the stock market suffers a decline, market pundits start touting the benefits of an allocation to alternatives. One example is the table below recreated from an Ignites article. Most notable is the headline to the table:
Every category of liquid alternatives outperformed the S&P 500 as the market index took a spill in the last quarter of 2018. But the performance boost wasn’t enough to catch up to the stock market’s returns longer-term.
The most important components of this chart may be what’s missing—the high-quality fixed income categories. At its infancy, asset allocation was the mixture of stocks and bonds. Stocks were the compounding machine to grow wealth and ensure inflation didn’t erode purchasing power. Bonds provided income and served as a ballast to the portfolio during times of market stress. Below is the same table as above; however, added are the high-quality fixed income categories. I also sorted in order of 4Q2018 performance.
No sane investor is going to invest in a bear market strategy over the long-term—unless they like losing money. After that, it’s the fixed income categories that top the chart—most of which delivered a positive return in the fourth quarter. Fixed income gets little attention during market stress—yet it delivers. I surmise it’s because it doesn’t have the pizzazz as alternatives. Old habits die hard. Perhaps the traditional asset allocation of stocks and bonds is one that never should.
Any opinions are those of Craig Popp, CFA and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Inclusion of the index is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk and investors may incur a profit or a loss, regardless of strategy selected.
Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. Holding bonds to term allows redemption at par value. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise.