Always Think Long-Term

The Value of Patience In Investing

As we reevaluate our portfolio performance and see negative returns, remind yourself that you’re investing for the long-term and to participate in our market’s economic growth for the future.

As I’ve written in prior articles, market return over the long-term historically has been positive in a diversified portfolio. However, during the short-term we can have very uncomfortable periods in the stock market.

Sure, the stock market in the last 3 years returned historically very high returns, but bull markets don’t last forever.

Looking at the S&P 500, Dow Jones and Nasdaq stock market’s being down year to date you begin to panic and worry that the negative returns will last a long period of time, but we remind ourselves that each portfolio is diversified.

Thus, if an index is reaching a recessionary decline of 20%. That does not mean your portfolio is down by that much. Each individual client portfolio is following the plan setup with the expectation of negative returns during bear markets.

Stocks and Bonds are both down, but a down market does not last forever. History has shown that bear markets can often be followed by bull markets that could outperform for many years.

In the short-term we may panic but investing and sticking to a plan and portfolio allocation allows you to be disciplined without selling and trying to time the market. When we attempt to time the market, you ultimately Miss The Best Days. As you can see in this blog post I wrote in 2020 about the timing the market.

Most clients are looking at Bonds and are wondering with the rough start, where do I think the historical averages and forward-looking returns could look like moving forward. When analyzing the returns for bonds having a rough start to the year, for the 12 months ending in April, bonds broadly are down 10.4%.

Which is close to the 11.3% average decline of the worst 1-year periods for bonds. However, returns 1 year later show an average return of 15.5% with only 2 mild negative years.

Bonds Worst 1 Year and Forward 1 Year Return

Bonds Worst 1 Year & Return 1 Year Later, 1980 - 2000

Source: BlackRock, Morningstar as of 4/30/2022. US Bonds represented by the IA SBBI US Gov IT Index 1/1/26-1/3/89 and the Bloomberg US Agg Bond TR Index from 1/3/89-4/30/22. Past performance does not guarantee or indicate future results. Index performance is for illustrative purposes only. You cannot invest directly in an index.

There are not that many periods where the Fed Fund Rate has been raised by 0.50% in the past 30 years. As Policy Makers have preferred a 0.25% Rate Increases. But the forward returns for the next 6-12 months for bonds have been nicely positive in every instance.

Average Returns After a Fed Rate Hike of 0.50% (1/1/90 – 4/30/22)

Source: BlackRock, Morningstar as of 4/30/2022. US Bonds represented by the IA SBBI US Gov IT Index 1/1/26-1/3/89 and the Bloomberg US Agg Bond TR Index from 1/3/89-4/30/22. Past performance does not guarantee or indicate future results. Index performance is for illustrative purposes only. You cannot invest directly in an index.

The reason to think Forward Returns might be consistent with history, is because the market has already priced in. The 1 Year Treasury Rate which usually moves in lockstep with the Fed Funds Rate already is yielding 2%. By the time the Fed Fund Rate reaches that level, possibly in a few months of economic conditions that could soften which often supports a rally in bonds.

Average Bonds Returns After Fed Rate Hike of .50%

Source: YCharts

As always, please do not hesitate to contact Sage Financial Investments for a Free Strategy Review or Second Opinion to discuss your portfolio or re-visit your risk profile.

*Investment advisory services offered through Brookstone Capital Management, LLC (BCM), a registered investment advisor. Investments and/or investment strategies involve risk including the possible loss of principal. For a complete description of investment risks, fees and services, review the Brookstone Capital Management firm brochure (ADV Part 2A) which is available from your Investment Advisor Representative or by contacting Brookstone Capital Management.

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