Understanding Fixed Income Performance
With the increase in stock market volatility we have experienced this year, investors may have wondered why their fixed income positions are showing losses. As a reminder, we view fixed income as a conservative asset class that offsets the risk of the stock portion of diversified portfolios. The primary goal for fixed income is capital preservation, with the secondary goal of generating income. The relationship between stocks and bonds traditionally has a low correlation, meaning they do not move in tandem with one another. This may result in stocks producing positive returns while bonds are negative over a specific time period and vice versa. The benefit of holding fixed income typically exists during periods of stock market stress, such as in 2008, when investment grade fixed income returns were mostly positive while stock markets fell between 40-50%. However, rising interest rates have weighed on fixed income returns this year while stock markets are now positive for the year.
As shown by the green arrow in the chart below, the yield on the 10-year U.S. Government Bond increased approximately 60 basis points for the year (100 basis points = 1%). Rising interest rates cause the price of bonds to decline, which is why the price return on the Barclays Aggregate Bond Index is down 3.3% for the year (shown by red line in chart). However, investors need to consider the higher income produced in their fixed income investments due to rising interest rates. When factoring in the increase in income interest of the Barclays Aggregate Bond Index, the total return is approximately 1% better than the price return (total return is down 2.3% for the year through 5/11/18).
Investors should review both price and total returns when assessing the performance of their fixed income investments. Although rising interest rates have an immediate negative impact on the price of underlying fixed income investments, it is important to understand that the price decline will be recouped over time via higher interest payments. Therefore, we believe fixed income still serves an important role in diversified portfolios to offset the risk of owning stocks despite the negative returns experienced this year. Given our outlook for rising interest rates, we positioned our fixed income to have less interest rate sensitivity by focusing on shorter term bonds. This has resulted in significant outperformance of our fixed income exposure relative to the Barclays Aggregate Bond Index this year, while still offsetting the traditional volatility that comes from stocks.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bouchey Financial Group, Ltd. [“Bouchey Financial”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, no portion of this discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Bouchey Financial. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Neither Bouchey Financial’s investment adviser registration status, nor any amount of prior experience or success, should be construed that a certain level of results or satisfaction will be achieved if Bouchey Financial is engaged, or continues to be engaged, to provide investment advisory services. Bouchey Financial is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Bouchey Financial’s current written disclosure Brochure and Form CRS discussing our advisory services and fees is available for review upon request or at www.bouchey.com. Please Note: Bouchey Financial does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Bouchey Financial’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a Bouchey Financial client, please contact Bouchey Financial, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.