Was a Drop in Bonds Inevitable?

Yes, but that doesn’t mean you could successfully trade on that knowledge, nor does it mean it is sure to continue for the foreseeable future.

There are rumblings in the bond market, and the financial media is starting to shout panic. Here is a graph of the Vanguard Intermediate Term Bond Index Fund since its peak on May 2, 2013. Returns have been -4.79% over this time period, roughly 7 weeks ago.

since may 2013

Did we know bonds would go down someday? Yes. Was it obvious when this would happen? Absolutely Not. Successful investors must separate the ideas of “if” and “when.”

The “if”

At some point interest rates were going to go up and there would be a drop in bonds as there has been in the last several weeks. Does that mean you were foolish if you were holding bonds recently? No. Just because we know something will eventually happen doesn’t mean we know exactly when it will happen. It may seem like splitting hairs, but it is a critical point.

The “when”

Since we don’t know when these events will occur, betting on them can be costly, even if we know they will eventually happen at some point in the future. What if an investor had been too early to the punch and sold out of bonds a little early? It would have been easy to do. Many professionals have been expecting interest rates to go up for many years now. What if you made a call at the beginning of 2011 to sell your bonds? You would have been disappointed with your results. Here is a chart of the Vanguard Intermediate Term Bond Index Fund since January 1, 2011. As of today, total return was 15.01% over this time period. Not bad at all for the conservative portion of your portfolio.

since 2011


Image by DonkeyHotey