Untucked Episode 91

Click here to listen to the full Untucked Episode 91. You can also listen on Apple, Spotify or Google podcasts.

Ep 91 Bond Market

Meghan Tait: [00:00:00] Um, so today we’re going to talk about an article written by Ben Carlson, um, who has a blog called The Wealth of Common Sense. The article’s titled, The Worst Bond Bear Market in History. Um, with long term bonds in a nearly three year decline, we’ve often gotten asked, specifically this year, why we continue to own them.

Today we want to discuss the reality of bonds, their relationship to interest rates, and why certain, why certain investors should continue to

Jeff Mastronardo: own them. So I was kind of Interested in this topic because I’m just I’m not tired of it. I’m just I guess tired of it I’m tired of getting the question from clients like bonds are so bad They’ve been and that’s and that’s very recency bias.

Like they’ve been so bad the last 24 months Or 18 months or however, whatever the time frame is like, why do we even have them? Like what are we doing? Shouldn’t we get out of them because I don’t see any hope for them in the near future And I happened to be in a client [00:01:00] account yesterday and I looked at one of like that aggregate bond funds or just kind of a total market bond fund or something or an intermediate term bond fund.

And I saw that in the cost basis it was down like 15%. I’m like, wow, that’s a lot. And I went back to see when it was purchased. I’m like, oh my God, it was bought in 2014. It’s like almost 10 years ago and it’s negative 15. But then I realized all dividends, all interest were reinvested over that time. So.

It’s really not down 15%. I didn’t go back to add up all the interest, but bonds pay interest every month. So I mean, that fund is definitely up. Bonds are definitely up over that decade, right? You would imagine. I haven’t like done, done the research in the back, like I haven’t gone back, but over the last 10 years.

Bonds are positive.

Mike Traynor: Total return, yeah. Just because you gotta count the interest. Sure. So

Jeff Mastronardo: total return bonds are up. And we’re in this time frame now where interest rates have [00:02:00] skyrocketed which drove bond values way down. So they’re at losses from when you bought them if you bought them a year and a half ago.

So is now the time to get out? Get rid of bonds? And just park your money in a 5 percent money market instead of bonds? Okay, so

Mike Traynor: I would say no, uh, because, you know, interest rates are going to go up. Interest rates are going to go down. It’s the most common thing that people, a lot of people say. They have conviction in what interest rates are going to do and there is nothing more unpredictable than interest rates.

Literally, it’s the hardest thing to predict. Professional, amateur, or anything else. There’s so many factors that go into what drives interest rates up or down. Um, and the reason to own bonds is not whether they’re recently up or down. It’s because they are the counterbalance, [00:03:00] typically, to stocks in a balanced portfolio.

If that’s what you believe in, that’s what you do. Um, most times when stocks go one way, bonds go the other, or don’t go. Anywhere or vice versa. And that’s, that’s the whole point of having it’s diversification, et cetera, et cetera. Um,

Jeff Mastronardo: Lots of

Mike Traynor: people will just take what happened to your point about recency bias, observe that interest rates have gone up and just say, well, they’re going to continue to go up.

So bonds are going to continue to go down. So why do we have, um, If and when the opposite happens. For whatever the reasons. And you own bonds, you’re going to be pretty happy because interest rates go down. Bond prices go up just like they went down. That’s just math. So to me, it’s just that simple. Um, it’s not at all about looking at what has recently done what you would do the same thing with stocks.

You don’t say, well, stocks have [00:04:00] been shit for the last 18 months. So why do we have them? Right?

Jeff Mastronardo: Well, let me, let me ask you this. If bond, if interest rates stayed exactly where they are now for the next three years, wouldn’t you get higher than money market yields on bonds? Yeah.

Mike Traynor: If you own… So that’s why you own them.

If you own… Again, I guess the answer is it depends because it depends on what the… You know, what longer term bonds are paying versus intermediate or

Jeff Mastronardo: short or whatever.

Mike Traynor: But generally speaking, yes. Especially if you have like corporate bonds that are paying hard. Like, so yes. You

Jeff Mastronardo: can’t hold a money market at 5 percent and then take risk by taking debt in a company and get paid less over a longer period of time.

Correct. It just can’t happen. The market doesn’t work that way. Right. And I just don’t understand why people don’t understand that. Am I just blinded by… They’re like our, our, our clients and investors emotion. I

Meghan Tait: not blind. I don’t think you’re [00:05:00] blinded. I think they’re looking at their bank paying five and then they see the performance of their, the bond portion of their account being off.

And it’s like, why wouldn’t I just swap them? Right. Why wouldn’t we just do that instead? I don’t

Jeff Mastronardo: think you’re blinded by anything. I guess I’m feeling this way because I really never had to feel this way before. Like over the last 20 years, if money markets were paying 5, you obviously wouldn’t sell your stocks to go there because over the long term stocks are going to do better.

Right. There’s no question they’re going to outperform money markets. And bonds have always kind of held up over the last 20 years because interest rates went down. And I’ve never had to really defend them. Until until today.

Meghan Tait: Yeah, but then just remember all of the other factors at play today, which again, I would argue I’ve always been in some version of themselves, but people are [00:06:00] nervous and scared and there’s uncertainty.

And I think it’s just there’s an element of right money, market funds, banking products that. Provides assurance. So I think it’s more psychological capital than anything. So you’re saying I haven’t had to defend them I don’t know that it’s bonds specifically, right? It was stocks last year. It’s like I can go get five at in safe money Right.

I don’t, I don’t know if I can tolerate the, the ups and downs in the volatility. And I think that’s, at least in my, that’s more so what I’m, what I’m dealing with or what I’m hearing.

Jeff Mastronardo: And I think it just takes time for people to start, if they even pay attention to it, which I would say 80 percent of investors don’t.

Like if you have half your money in bonds and you grab your year end statement this year and you look at the, the total income generated in your, in your account, it’s significant. Right? Like you have a high yield from those, from the bonds that you own. So I think it might just take time for people to [00:07:00] start realizing that, that they, they do pay interest instead of just looking at, you know, the value and how that’s changed.

Yeah, I agree. Yeah. And I think

Mike Traynor: the problem was last year still, which was unprecedented in so many ways in which stocks were down anywhere from 10

to 30, depending on what kind of stocks. And then bonds were down, you know, 10 to 15. Yeah. Never happened before. That’s a, that’s hard to take. Especially for people who expect the, what normally happens to happen, which is that, Oh, well at least the bond like 2008 bonds held their held serve while stocks got pummeled.

That didn’t happen this

Jeff Mastronardo: time. So last year, like. Um, we, we said that it was kind of like, it’s never happened before to that degree. And it was to that, to that, a length of time, because obviously stocks and bonds move the same way a lot of times, but never for that long of a [00:08:00] duration. Is that correct? And that’s severe.


Mike Traynor: The double digit declines in both asset classes is just like unheard of.

Jeff Mastronardo: So now is when like all the articles start cropping up that like 60 40 is dead balance portfolios are dead because that’s like. It’s so easy to pick on that at this point. We all kind of disagree with that, that that stuff is dead.

Yeah. Yeah. And like every other conversation that we’ve had when it was the other way around, when people were questioning stocks, my follow up question, after I defend bonds, when people say, should we get out of bonds? I defend why we want to keep them, but then say, like, what else would we do? Like, what else are people looking for?

You know what? Yep, we should get out of bonds and we should, um, use an income. Our income play and our safe play is going to now be Bitcoin. Like, it can’t be stocks because now you’re just 100 percent stocks. You can’t park it in cash because then you’re going to miss the run up of bonds if [00:09:00] and when interest rates go down.

And over the next 3 years or 4 years or 5 years you’ll probably be worse off sitting in cash. Yeah, because some

Mike Traynor: people would say, well then why do we, if cash is paying 5, Sell all the bonds and just have everything in cash and stocks. That’s great. So long as nothing changes and what you just said would be the good example.

If interest rates go from, I’m using round numbers, they go from five to two. Well, now your money market’s paying two and the bonds that you ditched have appreciated significantly and you missed

Jeff Mastronardo: all of it. So I’m going to play devil’s advocate. I’m the advisor. I’m the, or I’m the client. I’m the investor.

I’m going to say to you, I’m going to just keep it all at 5%, and when the Fed meets, if they raise it 25 basis points, then we’ll, or if they drop the interest rates, 25 basis points, I’ll jump. We’ll jump back in bonds then nine times out of 10. If you go to the client and say, Hey, they dropped points, uh, interest rates, 25 basis points.

Let’s go do that bond move that you talked about. What are they going to [00:10:00] say? No, no, no.

Meghan Tait: I’m getting five on

Jeff Mastronardo: my mind. They’re not going to do it. So you’re going to, and, and then you have to have faith that they’re going to continue to cut. Rates, which who knows?

Mike Traynor: Yeah, it’s again, the most unpredictable thing, no matter how many, how confident people are in writing about it and talking about it.

It’s silly to try to predict the direction of interest rates in the short or intermediate term. In my opinion,

Jeff Mastronardo: it all comes back to like, investing is boring. Just pick your strategy. Stick with it. Don’t change it. Like unless something. Unless someone figures it out and there is some formula that comes along that solves the mystery of What’s going to happen in the future?

But today like no one’s figured it out Yeah, people just don’t want to hear it.

Meghan Tait: I think in in their defense that they’re being the [00:11:00] people like Over the last almost 24 months now, it’s, it’s sucked to hear, like, I, I know it’s what we’re supposed to say, I know it’s what we’re supposed to do, and I feel convicted in that, um, but it sucks, like, it’s been ugly, and, and to say, like, it will get better, um, I think it’s just, we’re reaching a point in time, you said this in a meeting the other day, like, we’re reaching a point in time where I think people are kind of hitting breaking points.

Um, and that’s, I think, normal from a, from a human, you know, behavior standpoint. It’s why we exist. To make sure that, you know, bad decisions aren’t made at these times, but I’m trying, I think we’re all trying to have a little bit more kind of empathy as it relates to like where investors are today compared to, you know, 12 months ago compared to 24 months ago.

Like the [00:12:00] change over the last two years has been. Or three years, I should say. It’s been, like, dramatic.

Jeff Mastronardo: So, September and October I’ve heard. Because I felt like people were starting to feel better. Yeah. Because the stock market was doing well. Yeah. Through the first half of the year, and then so quickly they gave it all back.

Mike Traynor: But it kind of wasn’t. Like, I mean, last year was last year. Last year was, everything was down. Nowhere, nowhere to hide. This year is, I think I just read where more than half of Stocks and just using the collective group stocks are down over 10 percent year to date more than half. Yeah, that’s bad but yet you have like the magnificent seven or whatever they call the stupid tech stocks that are just Still up huge and there are so they’re so massive that they’re dragging Certain indices like higher and they’re kind of masking what’s going on underneath.

I think that that is real and people [00:13:00] Maybe feel that, um, because certain funds or certain investments they have are not up. And, uh, and, and certainly I think if you’re like a stock picker, I

Jeff Mastronardo: can’t imagine what you’re dealing with. Yeah, small and mid caps are kind of

Mike Traynor: struggling this year. Yeah, big time. Um.

And value too. Like everything other than big tech is, is.

Jeff Mastronardo: I mean, it’s, it’s needed though. Like, I mean, we, we’re not going to get the four or five years consistently of good markets unless you have pain points like this. And it sucks. It’s brutal personally to watch your investments go down. It’s brutal to talk to clients all day that are just still disappointed after 18 months.

I mean, they’re, they, they have faith and they believe and they’re hanging in, but it’s, it’s awful. It’s, it’s miserable to go through it with them and for them when they look to you as, They’re professional and you said it, Meg, like we got to have that empathy. We have to be convincing in a meeting, [00:14:00] like the reason we’re not going to move to a money market and you have to trust me, Sally and John, is that you’re going to stay in bonds and believe me, three, four years from now, five, you’re going to be better off by owning those bonds and they have to feel that conviction or they’re going to like.

They start scratching their head and then they start worrying more and then they start losing sleep and like that’s our job to be Empathetic and it’s good to hear you say that because I start to like it’s hard. It’s hard to keep that as an advisor every day all day When it’s just hey, look, you know We’re only we’re only up three percent this year, but hey, it’s better than being down 20 like we were last year and they’re like, yeah Nobody’s leaving the meeting high fiving man.

It’s tough

Mike Traynor: Yeah, and I I think I still think one of the hardest things to remind people ever talk about is just that you got to disconnect the geopolitical stuff and the corrupt politicians and all the other things you want to point [00:15:00] to from The markets and the investments because they are, I mean, it’d be stupid to say they’re not related, but they are, they’re, they’re not related because it’s always the case that you have big stuff going on in the world and the tendency to just very simply look at the, the impact it has on the investments and say, what are we doing?

I mean, things are going to shit. So why are we, why are we doing

Jeff Mastronardo: this? That stuff is part of the market, but it’s not the market, right? The market’s way bigger than

Meghan Tait: that. Yeah. I feel like, yeah. This year more than I can remember recently, like the asking for predictions questions come about like, what are you feeling?

What are you thinking? What are you guys seeing? I’m feeling pretty

Jeff Mastronardo: shitty right now, John. Don’t push me.

Meghan Tait: You know, and, and like, again, you want to, we’re in it too. Like all of this affects us personally, professionally, like, and, and there’s of course shit to worry [00:16:00] about and be concerned with. Um, so you don’t want to dismiss or diminish those feelings, but like there, there isn’t a prediction.

Like there isn’t a, an answer to that other than I don’t know. And again, I feel like if there are two years of just really tough markets, the I don’t know is harder for people to accept.

Jeff Mastronardo: Good advisors will give you the, I don’t know, but this is what we’re going to do about it. And this is

Mike Traynor: our plan. Which is why so many advisors. Uh, succumb to that temptation and they have an answer is like, here’s what we’re going to do. We’re going to rotate out of this and into that. And we’re going to, and it’s just some made up activity that makes it seem to me.

That’s an easier thing to do.

Jeff Mastronardo: Oh my God. It’s way easier. And it makes people feel so much better. Right. Yes. I talked to my person, man. They I mean the reasons they gave me for why interest rates are going to go this way and what we’re going to do about it And the [00:17:00] changes we made whoo. I feel so much better and nine times out of ten.

They’re worse off because of it Yeah, we see

Mike Traynor: it all the time. Yeah. Yeah

Jeff Mastronardo: All right,

Meghan Tait: things will get better right? Hey clients,

Jeff Mastronardo: you can still bring your bond questions to me I promise I won’t lose it