The Risk

Investors have been worrying about a rising rate environment for a few years now. What would that do to their bonds, and how would a normalization in rates affect stocks? The jury is still out, but so far so good.

From July 2016 through February 2018, the ten-year treasury rate rose from 1.37% to 2.94%. Over this 19 month period, a broad basket of bonds (BND) fell 2.13%. Fortunately, stocks more than made up for this, rising 33% over the same time. Since rates began their ascent in February 2016, a 60/40 portfolio rose 19%, or 11.7% on an annualized basis.

Bonds fell 2% over the past nineteen months; Stocks fell 2% four times in the past twelve sessions.

I’ve said this before and I’ll say it again, the biggest risk to investors is not rising rates.  The biggest risk is being over exposed to stocks and the volatility that they’re certain to deliver from time to time.

The chart below shows the rolling 30-day standard deviation of a 60/40 portfolio broken down between stocks and bonds. Over the past 20 years, 86% of the volatility of a 60/40 portfolio has come from stocks.

Whatever happens to interest rates going forward, don’t lose sight of the fact that stocks are the risk.

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