The Value of Bonds in Market Downturns — COVID-19 Edition

Just prior to when the Subprime Mortgage Crisis of 2007-2008 was beginning to take hold, I had switched my 401(k) stock portfolio to an all bond investment option. It helped to soften the blow of the ensuing stock market crash and, most importantly, I learned firsthand the value of bonds in market downturns.

I made a mental note of this strategy and stored it away in longterm memory for the next downturn, which I guesstimated to occur within 7-10 years (that's a long time to wait and remember!). As the historic bull market continued down its course, however, I inadvertently became side-tracked.

With a busy work and travel schedule, and a newborn on the way (my first child), I didn't remember to execute the same strategy once the COVID-19 pandemic was unraveling. The problem is I've been more focused on alternative investments like real estate and private equity that my 401(k), accrued from my previous career as a software engineer, was very much in a set-and-forget mode.

A real estate development project I was recently working on.

So when I finally remembered, my heart sort of sank—not because of whatever losses I would see after logging in to my Fidelity retirement account, but because after so many years of waiting for it, I missed it! It's no good having a strategy if you don't execute it!

May 3, 2020: My 401(k) stock portfolio down around 14%, S&P 500 down around 10%.

Through March and early April 2020, I observed my 401(k) all stock portfolio down 20-30% for the year, whereas an all bond investment option was about even at 0%. Fast forward to May 2020 and the stocks have pared their losses to around -13% while the bonds are up close to 5% (still an almost 20% differential).

May 3, 2020: U.S. Aggregate Bonds up around 5%, a differential of almost 20%.

Treasury Inflation-Protected Security (TIPS) are comparable to bonds around 4.5%.

I think stocks will to continue to sag and lag from the massive global effects of the pandemic just like it did after the housing crisis, which is why I'm glad to have (1) a diversified portfolio, heavy in real estate, private equity, operational businesses, and overseas markets, (2) time to wait and sit through the market cycles, and (3) no near-term needs for my 401(k).

The key here for me is not timing the market to maximize gains, but rather, to lock in gains after 5-7 years and being content. The reason I can be content with non-optimal gains is because most of my eggs are not in the stock basket. I prefer to actively trade my time and energy (and resources) on investments that I can fully, easily, and strategically control and understand.

I'm sure my retirement portfolio will be back strong in the green within 2-5 years so in the meantime I will continue to stay focused on alternative investments that remain hot and ripe for the picking. But I'll make another mental note, next to my previous mental note, to be ready for the short-term switch to bonds again in about 7-10 years.

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