Despite years of repeating the message, I find that bonds still get no respect as one of the best diversifiers of equity risk. But who can blame advisors for wanting to include more appealing investments in client portfolios? After all, fear of the possibility of higher interest rates has prevailed for more than a decade.
The recent volatility in the equity markets left me curious: To what extent did the various diversifiers offset stock-price declines? The chart below presents the results for the six trading days between August 17 and August 24, when the U.S. equity market returned –11% and caused some investors to panic. It wasn’t surprising to me that, once again, bonds held up fairly well, mitigating some of the losses from the equity portion of balanced investor portfolios.
The message to me is as clear as it ever was. High-quality bonds remain effective diversifiers, especially during sharp equity market declines, and they deserve more respect.
I would like to thank Yan Zilbering for his contribution to this blog post.
Francis M. Kinniry is a principal in Vanguard Investment Strategy Group, whose primary responsibilities are capital market research, portfolio design, development and implementation of customized investment solutions, investment market commentary, and research. The group’s proprietary research on investment, economic, and portfolio management issues has been published in leading academic and practitioner journals. It also is responsible for establishing Vanguard’s investment philosophy, methodology, and portfolio construction strategies. Mr. Kinniry has worked extensively with ultra high net worth families and institutional investors, creating customized portfolio solutions for their investment needs. He also initiated the Vanguard Investment Counseling & Research department and Vanguard Asset Management and Advisory Services. Before joining the company in 1997, he was a partner and senior portfolio manager for Executive Investment Advisors, Inc., an institutional asset management firm. Previously, he was a portfolio manager for H. Katz Capital, a venture capital and hedge fund manager. Mr. Kinniry has more than 20 years experience in the industry and is a regular speaker on investment, economic, and portfolio management issues. He is a Chartered Financial Analyst® charterholder and earned his M.B.A. and bachelor’s degree from Drexel University.