"Who would own bonds?" is what you ask during a seemingly endless S&P 500 bull market. But in the throes of the coronavirus stock market crash the question is, "Why didn't you?"
If you own individual stocks, you should have gotten out and stayed out. But if you're a long-term investor, with ETFs or mutual funds, owning a traditional asset allocation of bonds did exactly what it should have. The moderate portfolio with 60% stock and 40% bond cut your losses.
A so-called balanced portfolio, with 60% in S&P 500 stocks and 40% in bonds, is only down 12.6% this year. That's just a little more than a correction. And it's 10 percentage points better than the full-fledged 22.6% bear-market hit on an all-stock portfolio.
This is based on an Investor's Business Daily analysis of price movements of SPDR S&P 500 ETF Trust and Vanguard Total Bond Market ETF.
And it shows traditional asset allocation works, even in extraordinary times.
S&P 500: Holding On Brings Risk
Bonds seemed useless when S&P 500 stocks were soaring. In the widely-followed report published in late 2019 titled "The End of 60/40," Bank of America strategist Jared Woodard urged investors shift more to stock and away from bonds. "60/40 may have thrived in the 2000s and 2010s but will not survive the 2020s," said the report.
The author suggested so many people rushed to buy bonds up through 2019, bond prices were inflated. A bond bubble could pop, he noted, and when it did bonds wouldn't provide the expected protection.
But then the coronavirus stock market crash arrived. Every S&P 500 stock sector suffered, some by staggering amounts.
But bonds did exactly what they're supposed to: Offset S&P 500 losses.
Bonds Do Their Job In S&P 500 Coronavirus Stock Market Crash
Bonds have held up just as they should — even with the S&P 500 crashing.
This year, the $656 billion-in-assets Vanguard Total Bond Market ETF rose 2.5%. And that doesn't even include the current 2.6% yield, says S&P Global Market Intelligence. And the bond ETF is still up 0.7% from the day the S&P 500 peaked.
Had you put just 40% of your portfolio in bonds at the start of the year, you'd only be down 15.8% from the nose-bleed top on Feb. 19. That's a far cry from the 26.4% hit you've taken on an all S&P 500 stock portfolio.
And depending on your risk-appetite, a bigger allocation to bonds would protect you even more. A portfolio with 40% in the S&P 500 and 60% in bonds would only be down 7.5% this year and 10.3% from the market's peak.
It's not just due to holdings in U.S. Treasuries, either. The Vanguard Total Bond Market ETF is 43% weighted to U.S. Treasuries. Another 23% is in mortgage-backed securities, 16% in corporate bonds and 9% in financials.
Perhaps this was the last win for the 60-40 portfolio. Much of the strength in bonds is due to government intervention. And there has now been a follow-through day to signal it's safe again to own top growth stocks, though with the coronavirus pandemic largely unchecked investors need to be cautious.
But if you're a long-term holder of diversified ETFs, remember how bonds protected you from the coronavirus stock market crash.
The 60-40 Portfolio Held Up Better In Coronavirus Stock Market Crash
| % Portfolio In S&P 500 Stock | % Portfolio In Bonds | Ch. (%) From Feb. 19, 2020 Peak | % Ch. YTD |
|---|---|---|---|
| Riskiest: 100% (all stock) | 0% | -26.4% | -22.6% |
| 80% | 20% | -21.1% | -17.6% |
| 60% (balanced) | 40% | -15.8% | -12.6% |
| 40% | 60% | -10.3% | -7.5% |
| 20% | 80% | -4.9% | -2.5% |
| Conservative: 0% (all bonds) | 100% | 0.7% | 2.5% |
Source: IBD, S&P Global Market Intelligence data through April 2, 2020, based on SPDR S&P 500 ETF Trust and Vanguard Total Bond Market ETF
Follow Matt Krantz on Twitter @mattkrantz
