Stock and bond correlation?

[Neil]

When I finally finished my first ever investment book Millionaire Teacher recently, with zero financial knowledge beforehand, I simply took it that with a 50/50 stock/bond split, worst case scenario would simply be that half of my money is safe if stocks plummet for the length of my retirement. And hopefully the bonds would gain slightly (or not, in Japan?). But I believe I’ve read somewhere since about an inverse correlation between stock and bond prices? That bonds will actually increase in value opposite to a stock drop. Is that right? If so, can someone explain why that is? That would make a 50/50 split look rosier.

[RetireJapan]

I believe the relationship between stocks and bonds is not that simple: http://www.nasdaq.com/article/the-price ... s-cm691905

Bonds are less volatile, but stocks tend to appreciate more over the long term. The current low-interest environment is complicating things, as is the fact that we have had a bond bull market and a stock bull market at the same time.

[concerned]

"as is the fact that we have had a bond bull market and a stock bull market at the same time."

Thats a bit of a scary scenario. I wonder will people keep their nerve if both start falling in the next downturn...

[RetireJapan]

"as is the fact that we have had a bond bull market and a stock bull market at the same time."

Thats a bit of a scary scenario. I wonder will people keep their nerve if both start falling in the next downturn...

I think the thing to remember is, if you are still buying, falls in the price are things going on sale. It's a good thing.

If you are no longer buying, make sure you have some cash reserves and a good mix of bonds and stocks. Remember that a bond crash is nowhere near as bad as a stock crash.

[DragonAsh]

Remember that a bond crash is nowhere near as bad as a stock crash.

Er, no. Bond crashes can be every bit as bad as stock market crashes.
It's hard to come up with an investment viewed as more safe than short-term US T-bills. What do you think the biggest real drawdown has been for US T-bills?

[RetireJapan]

Er, no. Bond crashes can be every bit as bad as stock market crashes.
It's hard to come up with an investment viewed as more safe than short-term US T-bills. What do you think the biggest real drawdown has been for US T-bills?

Interesting. Would love to see the numbers

[fools_gold]

Hi Neil

From what I can gather, for Japanese investors the only asset classes that are inversely correlated to stocks are cash and Japanese bonds. You can expect foreign bonds to take a hit during a stock market crash because the yen usually strengthens. A strong yen is also usually bad news for Japanese stocks. If you go to http://myindex.jp you can see how your asset allocation would have performed over the past 20 years in yen terms.

[eyeswideshut]

Well I think the negative correlation of Japanese bonds is primarily (as you point out) due to the fact that the Yen historically strengthens in bear markets (thus making Yen bonds more valuable). Whether that trend will continue into the future is of course debatable. The problem with Japanese bonds and cash is the miniscule yields which make them highly unattractive to me as investment vehicles. Also, since most of my income is paid in Yen, I already have enough exposure to the Yen so I prefer to diversify into other currency and asset classes.

If you are concerned about a bond bear, then a laddered GIC may be a good option. Japanese banks offer US dollar and other currency fixed term deposits. I have found the rates to be pretty poor compared to those offered by overseas banks but if you don't have access to overseas banks then it could be a good option in lieu of bonds.

Has anyone seen a comparison of which Japanese banks offer the best fixed term rates across a variety of currencies? Would be curious to see if there are any banks offering competitive interest rates.

[DragonAsh]

Er, no. Bond crashes can be every bit as bad as stock market crashes.
It's hard to come up with an investment viewed as more safe than short-term US T-bills. What do you think the biggest real drawdown has been for US T-bills?

Interesting. Would love to see the numbers

Biggest real drawdowns have been over 40% in 'safe' short-term T-bills.

[RetireJapan]

How about something like BND?