We are in an unprecedented bear market. By the end of last week, the S&P 500 had fallen 47% from its peak. As bear markets go, this already ranks as one of the severest: slightly worse than the previous bear market of 2002 and only bested by a few others. But it is the speed of decline that is stunning. Unlike most other bear markets, which were protracted affairs, stocks have fallen astonishingly fast with the bulk of the declines occurring in the last two months.
It might be an odd thing to say when stocks have been battered and bruised but we may have too much allocated to bonds. As investors with more than two decades to retirement, we hold bonds for only one reason — to lower the volatility of our portfolios. Simply put, bonds help us to sleep better. And bonds have fulfilled that role admirably as stocks have swooned.
As investors pay a high price for the relative “safety” of bonds, which have an expected return that is much less than stocks, the allocation to bonds should be just enough to keep the investor from panicking even in a severe bear market. I was hardly bothered by the rather severe declines recently and slept like a proverbial baby, which might suggest that our allocation of 20% to bonds might be a bit too high and could be trimmed back by say 5%. I haven’t made any changes yet but is something to consider in the future. Unlike the person in Warren Buffett’s colourful depiction who we find is swimming naked when the tide goes out, I’ve been swimming in heavy-duty parkas.
PS: Don’t forget to cast your vote today!