The Same Old Story

A headline from a piece in the New York Times on August 28 read as follows:

While Wall St. Talks of Recession, Bond Investors Make a Killing

^{You should have bought bonds. They’re doing great.}

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As you can guess, the piece reported how well bond investments have done this year (primarily due to the decline of interest rates around the world.) This is nothing new - interest rates have been falling for nearly forty years. 

But what really caught my eye was feedback from two investors quoted in the piece. First, George Alexander.

"But bonds are still surprising investors who thought of them as a safe, low-return, bet, like George Alexander, a 38-year old software engineer, who bought a fund of high-quality long-term bonds in February. Mr. Alexander was not expecting big returns from the bonds. After an ugly sell-off in the stock market, he figured that he could collect an advertised 3.5 percent annual yield on the bond fund while he waited for the uncertainty to clear."

Here's comments from another investor, Gilbert Shank:

"For many, the noisy political environment — and the potential damage it could do to the economy — is the primary concern. Gilbert Shank, a 30-year-old customer service representative at an industrial equipment supplier in Minneapolis, knows that with decades to go before retirement, his portfolio should be heavily weighted toward stocks. But early this month, after stocks fell sharply, Mr. Shank grew worried about “political instability” and reports that the economy could be slowing down. He moved almost all the money from his 401(k) into bond funds. I’d rather risk missing out on some gains than risk losing a big chunk of what I have,” he said."

The real story here is not about bond returns. The real story is that we've come to normalize investor behavior governed by emotions and the belief that we can predict what's to come. Uncertainly and political instability have been a reality for hundreds of years. They will never go away. If you're trying to avoid them, you will literally never pull the trigger to invest in your lifetime.

I can't say for sure that sound asset allocation, consistent behavior and some planning are the end-all be-all into the future just because it has worked pretty well in recent history. I can say it's going to provide better outcomes and an improved mental state compared to constantly moving investments around based on the news of the day, being swayed back and forth between fear and greed.

Investments continue to be improved for the end user (lower costs, target funds, etc.) As highlighted above, decision-making around investments, seems to be more challenged. There is still much work to be done to better align investor decision-making with the high quality of investment portfolios that exist today.

I would encourage Mr. Alexander to invest based on what his future needs and timeframe are for that particular account, not based on things being uncertain. I would tell Mr. Shank that as a 30-something year old actively contributing to his retirement account, he should be applauding a downturn in the stock market. As I’ve said before, I’m personally sick of making 401(k) contributions at all-time highs.

As Taleb writes in The Black Swan, “History is opaque. You see what comes out, not the script that produces events, the generator of history.” 

Keep this in mind as you invest. Offset any emotion around your portfolio with a humility about what the future holds.

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^{Source: While Wall St. Talks of Recession, Bond Investors Make a Killing (Matt Phillips, New York Times)}