“Bonds & equities are falling in my pension – I must do something”….said almost everyone who has an invested pension or investment. It is the natural reaction, and it seems the obvious one, but should you do something, and if so, what? In this week’s super-short piece, I share 3 things you might consider doing about it your Bonds & Equity values falling. I hope it helps.

Key Takeaways

• A workable financial plan will help with bonds and equity values falling
• Keep focused on your long-term investing goal
• Stay Patient

Bonds & Equities Falling: The Background

Bonds and Stocks have fallen simultaneously to a greater degree than they have done for more than 45 years (according to WSJ from a US context). Typically people hold even a small portion of Bonds in portfolios as they offer a diversification in terms of trajectory to Equities.

However, we have just experienced a period of time where both were declining pretty significantly – hurting portfolio values more than one would see in times of temporary Equity declines.

Below you will see the performance of Vanguard’s Global Bond Index (EUR ACC) and Vanguard’s Global Stock Index (EUR ACC), both domiciled in Ireland and offering low fees. These are just examples to show the performance of such index funds, as they are pure representations of the overall market, as opposed to complex financial insurance products…

In the 6 months from mid-January to mid-July 2022, you can clearly see that Equity declined by over 7% and Bonds by over 9%. This is unheard of for them both to fall by this much. It is another days-work to discuss why each is falling but let’s summarise all of the world’s inflation, interest rates and supply & demand issues by calling it ‘world events’!

The natural reaction is to panic, to conclude that ‘this time it’s different’ and to sell your Bonds and perhaps also move your Equities to Cash (for it to be absolutely guaranteed to be eroded at least in the short term by our currently-high inflation rates).

#1 Have a Workable Financial Plan

I’m biased, of course, but for good reason. Having a workable financial plan will help you cope with bonds & equities falling. Even in the face of scary temporary market declines, having a road map that shows you where you are potentially heading is massively assuring.

We ensure we update and step-through the financial MasterPlan of each person who works with us at least once per year. In times of positive markets, it’s assuring, of course, but more than doubly-so when markets are going the other direction (which they will continue to do from time to time until the end of time!).

Having a plan which is based on modest assumptions, and which has margin for error built-in helps people to remain calm and to not react. If you have one, re-visit it. If you don’t have one, try to get one or build one.

#2 Keep Long Term Investing Perspective

We saw earlier how the Bonds & Equity funds have declined temporarily by 9% and 7%, respectively over the past 6 months, but what about the last 13 years (a decently-long perspective and the start date of that particular Bond Fund):

23/6/2009 to 15/7/2022 Bonds have delivered +42% and Equity +377%.

As Equity (and indeed Bond!) investors, we must retain our long-term perspective, while every media channel in the world is trying to get us to shorten our perspective to today’s headlines! It is simple but not easy to retain our perspective but your sleep will thank you for it.

While you may be on the cusp of retirement, and are keen to reach that ‘start-line’ with as much of your pot intact as possible, remind yourself that you are not going to be drawing any of the pot until you are good and ready. Also, remind yourself that when you do start to draw it, you will be drawing approx. 0.0333% of your pot per month (4% divided by 12)!

We have written before about how big our pensions should be – and fully accept that we get worried or despondent when we see our bonds & equities falling – but really, try to tune it out and stick to your own actions.

Also, assuming you have a plan, which has an appropriate corresponding portfolio, your pension will be invested in such a way that, irrespective of recent declines, you will be in a positive position, and have options as to when and how to draw income to support your initial period of glorious retirement/independence!?

#3 Have Patience

Quite similar to #2, we must be patient when we witness temporary bonds & equities declines. According to ‘seeking alpha’ the longest ever Bear Market (20% or more decline in Equity values, remaining for a period of time before recovery) was 630 days in the US.

The shortest Bear Market was only 2 years ago where markets recovered after 33 days! So we can typically expect to have to wait between 1 month and 2 years before markets recover.

Final Thoughts Bonds & Equities Falling

The critical thing here is knowing that when we see bonds & equities falling they will recover. They always have, as you can see from the above.

If you believe they won’t or that the world will come to an end, then you have no place being invested at all – take it all out and spend it before we all perish!? However, if you are rationally optimistic, you know that values will recover and continue on their upward curve. Be patient.

I hope this helps,

Paddy.