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This hit home for me during the mini-crash a year ago. I was convinced assets like bitcoin or gold or bonds would hold value when the stock market tanked but in
by alasdair_ 6y ago
This hit home for me during the mini-crash a year ago. I was convinced assets like bitcoin or gold or bonds would hold value when the stock market tanked but instead saw everything fall at the same time.
I understand the concept of undiversifiable risk, but seeing it play out in practice was eye opening.
- reducesuffering 6y agoLong term US Govt. Bonds like VGLT did very well, increasing in value, in both 08 and Mar '20 covid crash.
- alasdair_ 6y agoThis is good to know. I think most of the modelling I looked at in the past used medium duration bonds as a proxy for the bond market as a whole. I wonder what TIPS did during the same timeframe actually. EDIT: I looked at VGLT and the mean annual return is extremely low, roughly 0.75%. I like the seemingly negative correlation with equities but I'll need to do some modelling to see if it's worth the massive hit in average expected return.
- reducesuffering 6y agoThe best estimated guess for a bond ETF’s returns going forward are it’s SEC yield, not past returns. This is because efficient market hypothesis postulates that the aggregate of bond buyers and sellers has reached equilibrium at its current interest rate. So it’s our best guess at the average of interest rate increases and decreases and their likelihood of happening. Given that, we assume the return going forward is what it’s currently yielding, and in VGLT’s case, it’s 2.15%. When cash is yielding 0.5% max, these can be a useful way of further protecting against equity downturns (assuming VGLT increases in downturns, negatively correlated to equities, true the past 30 years, mixed truth over 70 years), while still providing much better yield than cash.