The other day, a good friend said he had a little money to invest and wanted to know how he should invest it. A bunch of questions raced through my mind. Is it too soon to jump back into tech? Does Crypto still make people sound cool? Can we really be in for Japanese style stagnation where the market basically runs in place for the next decade? And if we should all be more diversified in foreign markets, which foreign markets should we be getting into?
It’s amazing how the second there’s a downturn in the market for anything more than a few days, our thoughts immediately turn to worse case scenarios. It’s like we barely remember that since 2009 when the FED started lowering interest rates, the S&P 500 has returned 762% including dividends. Of course it all depends on your time horizon and when you started investing, but if you’re up 762% in the past 12 years, are you really crying about a 10% correction to kick off 2022?
According to a great piece in the New York Times by Jeff Sommer, the bear markets of the past 50 years included:
34% in 2020
57% from 2007-2009
49% from 2000-2002
34% in 1987
27% from 1980-82
48% from 1973-1974
In each one of these historic downturns, the market always came back and provided steep profits to those willing to wait. So if you have the stomach to sit tight during losses, you’ll likely recoup your initial investment and then some. But if you’re getting close to retirement, or you just can’t stomach seeing the overall value of your portfolio drop by any of the figures listed above, it makes sense to put some of your money in bond funds moving forward. Here’s a couple worth checking out:
Vanguard Total Bond Market ETF (BND)
Invests In: Government bonds and corporate bonds with good ratings. (not those other kinda bonds!)
Expense Ratio: .35%
Dividend Yield: 2.5% on average
Vanguard Total Bond Market Index Fund (VBTLX)
Invests In: Treasury bonds and mortgage backed securities.
Expense Ratio: .05%
Dividend Yield: 2.5% on average
Vanguard Tax-Exempt Bond ETF (VTEB)
Invests In: Tax exempt bonds that can reduce the tax burden of your overall portfolio.
Expense Ratio: .06%
Dividend Yield: 2.03% on average.
Vanguard Short Term Corporate Bond ETF (VCSH)
Invests In: High end corporate bonds with short term maturities.
Expense Ratio: .05%
Dividend Yield: 2.4% on average
Vanguard isn’t the only company with good bond funds. Schwab’s U.S Aggregate Bond Index Fund (SWAGX) has a .04% expense ratio with a 3-year return of 5.32%. Fidelity’s Total Bond Fund (FTBFX) has an expense ratio of .45% and a 5-year return of 4.06%. Or if you’re just looking for a fund that still gives you a little upside when stocks recover but takes away some of the pain when they drop, Vanguard’s Balanced Fund (VBIAX) has an asset allocation of 60% stocks and 40% bonds with an expense ration of .07% and a historic return of around 7.34%.
A market correction is a great time to rebalance your portfolio and shift a little money into bond funds. They’ll never reach crazy heights like Tesla, Shopify or The Trade Desk, but there’s nothing wrong with them. Now I just have to convince my friend.
