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Bear markets: how long they last and how to invest during one

Bear markets: how long they last and how to invest during one post image

We’re often told that investing is risky. But it’s during wild bear markets that the risk truly hits home.

Most people can handle a 5% temporary loss when the market drops. That’s easily reversed.

Even 10% down only smarts a little.

But when the market caves 20%, our belief in solid ground can start to crumble.

We realise the bottom could be a long way down. The risk feels real.

Like most of our fears though, the way to confront a bear market is not to let it gnaw at us with ill-defined menace. The risk is best handled by understanding it, knowing your options, and having confidence that this too will pass.

What is a bear market?

A bear market occurs when the closing price has fallen 20% from its previous peak in an investable market. This bear market definition can apply to a global market, a single stock market, any other asset class (such as property, bonds, gold, or other commodities), or even a single share. 

The US Securities and Exchange Commission (SEC) adds the caveat that the decline should last two months or more to qualify as a bear market.

The media is more likely to raise the alarm though as soon as an important market dips 20%. Typically a 20%-plus decline in a broad market index like the US S&P 500 is taken as proof that a bear market is underway. 

That drop is interpreted as a bellwether indicator that investor confidence is evaporating and the contagion could spread. Even though another market such as the FTSE All-Share (or your own portfolio) may not yet be in bear market territory. 

And history and experience tells us that bear markets can plunge much further than 20%. The UK’s worst bear market in the past century was the -73% stock market crash of 1972-74.

Investing in a bear market is scary because it can herald large-scale wealth destruction which lasts for years or even decades. That can trigger panic-selling, which has damned the financial future of many a poor soul.

It’s critical you keep your head during the bleakest hours because most bears are relatively short-lived and transform back to bulls in time – as we’ll see below.

What a bear market looks like

We can see the impact crater gouged by the Global Financial Crisis in the chart below. It was one of the severest bear markets of the modern era.

The chart highlights all the main features of a bear market:

  • The previous market peak
  • The slide into bear market territory beyond 20% down
  • Multiple bear market rallies
  • The market bottom or trough
  • And eventually the recovery back to breakeven
A graph showing the bear market entry point, trough, rallies, and recovery of the Global Financial Crisis

Source: justETF: Performance of iShares MSCI World ETF October 2007 – March 2010. Dividends reinvested.

The MSCI World ETF entered bear market territory on 6 October 2008. Like many bear markets the fall unfolded over months. The MSCI World had dropped 24% from its previous peak a year earlier at this point. 

Along the way, bear market rallies offered hope the worst was over. However they fizzled out on 6 November 2008 and 5 January 2009. 

And just when you thought it was safe to go back into the stock market, equities plummeted to new lows.

The market bottomed out at -38% on 6 March 2009. Almost 17 months after the fall began. 

Technically this trough marked the end of the bear market. That’s because prices subsequently recovered to a new peak. 

But you couldn’t have known this was the turning point at the time. The news was dreadful, day upon day.  

We had no guarantee this was the floor – as this contemporaneous dispatch from The Investor reveals.

The market climbed back out of the hole and reached breakeven on 9 March 2010. (In nominal terms. Breakeven after inflation took until 2013).

The exact date of recovery is weirdly difficult to pin down. Living, breathing investors like us should incorporate dividends, inflation, and investment costs into our results before celebrating the vanquishing of a bear market.

Are bear markets normal? 

Yes, bear markets are relatively common. Vanguard’s data for the UK stock market shows it in bear territory for 11.3 years out of 76, or 15% of the time from 1945 to 2021.

The graph below shows the MSCI World stock index suffered six bear markets from 1970 to 2020. We added another bear market due to the pandemic in 2020.

And we’re in bear market territory now once you factor in inflation.

A MSCI World graph shows that bear markets are normal. There were six such downturns from 1970 to 2020.

Source: BRWM: Today’s market falls in the context of history. Data from Morningstar.

Unfortunately, bear markets are the price of admission when you seek the opportunity to earn big gains from equities. 

These periodic declines are shocks to the system that drive investors to demand an equity premium for bearing the risk of holding volatile assets.

If these risks didn’t materialise occasionally, then everyone would put most of their money in shares. And in such a world, equities would eventually earn a miserable, cash-like return.1

Crashes are as necessary as forest fires. They’re fearsome at the time but they set the stage for future growth.

The grey line in the graph above shows the growth of £1 invested in equities over the years. The risk is clearly worth taking.  

But those setbacks marked by those deep orange slashes are why investing is a long-term game.

Does a bear market mean recession?

A bear market does not necessarily mean a recession. According to fund manager Invesco’s paper on S&P 500 bear markets, only eight out of 17 bear markets coincided with a recession from 1927 through 2021.

In other words, the majority of bear markets do not signal a recession.

Moreover, recessions often rear their ugly heads without the stock market tail-spinning into despair.

According to Vanguard:

A bear market occurred in only three of the last 14 US recessions, and positive equity returns accompanied seven of those recessions.

Bear v bull market

Bull markets follow bear markets because the widely accepted definition of a bull market is a 20% investment price rise that follows a previous 20%-plus drop. 

A bull market is ended by the next sustained 20% or more drop. So bears punctuate bulls like extinction events in the fossil record.

A Vanguard analysis reveals the frequency of bear markets from 1980-2020 (MSCI World index):

A chart that shows the frequency of bear v bull markets in global equities from 1980 to 2020

The numbers show that the bear market vs bull market contest is a walkover for the good guys. 

Bulls dominate bears over the long-term both in duration and performance. 

World bear v bull market score (% of total years)

  • Bears: 13% 
  • Bulls: 87% 

This pattern holds for the UK stock market 1945-2020:

A chart showing the frequency of bear and bull markets in UK stocks (1945-2020)

Source: Vanguard: Bull and bear markets over time (UK).

UK bear v bull market score (% of total years)

  • Bears: 15%
  • Bulls: 85% 

And it holds in the US, too (1900-2020):

This chart shows the frequency of bull and bear markets in US stocks (1900-2020)

Source: Vanguard: Bull and bear markets over time (US).

US bear v bull market score (% of total years)

  • Bears: 17% 
  • Bulls: 83%

Another definition of a bull market requires prices to rise to new all-time highs on top of the minimum 20% lift from the last bear market low. 

Variable definitions – plus data discrepancies – explain why you’ll see different dates and results for bear and bull markets, depending on the source. 

Global bear markets may even disappear from the record altogether when viewed from the vantage point of the UK, as opposed to the US. 

For example, US investors have experienced nine global bear markets since 1980, according to Vanguard: 

A global equities chart showing US investors experienced 9 bear markets (1980-2020)

But four of those bear markets vanished when Vanguard analysed the same data in pounds:

A global equities chart showing UK investors experienced 5 bear markets (1980-2020)

Some of the discrepancy is likely explained by the fact that the pound tends to fall during a crisis while the dollar appreciates. 

Hence UK investors with a global portfolio dominated by US shares may be spared the worst. Sterling’s weakness is like a buoyancy aid for our US assets, providing a partial hedge against the state of the UK economy.

In this scenario, currency risk works for you. And it’s one reason why UK investors may be better off not currency hedging their equities.

Incidentally, on the Richter scale of fear, a market ‘correction’ is one level down from a bear market.

As uneasy is to alarmed, a market correction occurs when investment prices drop 10% to 19.99% from previous highs.

How long do bear markets last?

Bear markets last 30.2 months on average for global equities between 1900 and 2019. The shortest bear market was three months (1987’s Black Monday) and the longest was eight years and 11 months (World War One plus its prelude and aftermath).

The average bear market lasts 25 months, if we remove the WW1 and 1987 outliers. That’s according to Global Financial Data’s table of global bear markets:

A table showing the length of global bear markets 1900 to 1919

Why is the two and a half year average length of a global bear market so much worse than Vanguard’s 1.1 years quoted for the UK and US earlier in the article?

Well, the UK data series we cited began after both World Wars while the US emerged from each conflagration comparatively unscathed. In fact, both country’s stock markets had a good 20th Century, relative to rivals. 

Interestingly, contemporary bear markets look no less severe than the sepia-toned crises of pre-1950.

Investors were down -50% and -55% in the depths of the Dotcom bust and the Global Financial Crisis. That exceeded the losses inflicted on stock markets during the World Wars. 

Every bear market from the Vietnam War onwards was over inside two years – except the 30-month implosion of the Dotcom bubble. 

The WW2 bear markets and the 1929 crash lingered around three years, but they are easily outdone in the annals of misery by WW1’s ghastly nine-year slump.

However, we can never really know how long a bear market will last. 

So it’s best to gain as many historical perspectives as we can.

If we really want a scare, then Global Financial Data says the longest US bear market in history lasted 51 years from 1792 to 1843.

The longest UK bear market in history stretched an agonising 42 years from 1720 to 1762. Back then the London Stock Exchange fell 74% when the South Sea Bubble burst.

Perhaps we shouldn’t take ancient bear market history very seriously? The losses inflicted on bewigged speculators trading in 18th Century coffee shops may not seem to hold many lessons in the age of central bank bazookas. 

Not so fast! The fallout from Japan’s 1989 asset bubble bursting inflicted not one but three lost decades on that nation’s market.

Some argue the ensuing bear market is still ongoing. But I estimate the main Japanese stock market index recovered to breakeven in February 2021 – adjusted for inflation and dividends.2

Either way, this piece explains why most Japanese investors weren’t as badly mauled as a multi-decade bear rampage implies. In the real-world, investors don’t invest everything they’ve got in a single market on the very eve of disaster.

Still, check out this horror show of investing’s biggest falls if you like tingling your spine.

Investing in a bear market

The length of time you can spend trapped in the jaws of a bear suggests that special investing tactics are required.

Indeed, I came across a popular investment site that offered:

  • Switching to defensive stocks 
  • Buying inverse ETFs that bet on market declines 
  • Taking a punt on put options

Do not do any of this.

Defensive stocks (as represented by low volatility ETFs) are so much bear bait. They still go down in a stock market crash. They perhaps won’t fall as hard as high-risk growth equities, but defensive stocks are not a safe haven like bonds and gold can be.

Inverse or short ETFs are designed for professional investors betting on a market fall on a particular day. They can seriously backfire on passive investors who mistakenly think these products are useful during a prolonged bear attack. Read this piece on how short ETFs work if you want to know why.

Put options are also like playing with fire. Puts can be profitable if you’re a semi-pro investor. But you must also be prepared to take large losses when your positions blow up. If that’s you, then I’ll hand you over to Early Retirement Now’s material on the topic.

A passive investor learning this stuff in a bear market? It’s like walking into a casino half drunk.

Even fund professionals can’t outmanoeuvre a bear market.

Morningstar analysed active management performance versus simple US and global tracker funds during the latest slump. The active fund managers lost.

So forget market timing or switching up your asset allocation.

Instead, there are some straightforward but powerful techniques that can help you through a bear market…

How to invest during a bear market 

Bear market recovery times make for depressing reading. But the goods news is your bounce-back will be fast-forwarded by something you’re probably already doing: pound cost averaging.

Regularly investing over time shortened the UK’s longest bear market recovery time by a third. 

Do nothing and the UK market took nine years to breakeven after the 1972-74 stock market crash. (In real, inflation-adjusted terms, including dividends). 

However, the recovery period was reduced to six years by pound cost averaging.

Let’s consider an investor back in the 1970s who made regular annual contributions worth 3% of the portfolio’s initial value. For example, suppose £3 was contributed per year into a £100 portfolio, as depicted in the table below. (That’s equivalent to £3,000 in a £100,000 portfolio.)

As the table illustrates, their portfolio was back in the black by 1980 instead of 1983 with just these relatively modest contributions:

A table showing that pound cost averaging cut recovery time by a third after the UK's worst bear market (1972-74)
  • Contributions were invested at the end of each year and were not inflation-adjusted. 
  • Data from the Barclays Equity Gilt study. FTSE All-Share real returns. Dividends reinvested.

Most people who invest regularly do so monthly, but I don’t have access to UK monthly returns.

Nonetheless, this annual approximation shows the power of pound cost averaging to accelerate a recovery as the market rises again. 

Six years is still a long time to wait, but it’s substantially better than nine.

And you could have sped up the recovery by investing even more. This is especially feasible when you’re a relatively young investor, and your portfolio hasn’t yet grown to a size where new contributions won’t move the dial to the same extent.

Automatic remedial action

Pound cost averaging is underestimated because it enables us to do the right thing without agonising over it. 

Much as we know we should buy stocks on sale, for instance, it’s much easier to say than do. It takes courage to fling money at a bear market when you feel like you’ve been punched in the gut. 

But automating the process with a monthly regular contribution enables you to buy the dips and lower the average price of your holdings. 

Those cheap shares ultimately reward you with tidy profits as prices rebound. 

As the bear v bull market charts above remind us, equities typically bounce back like Rocky shaking off bad-dude haymakers.

That’s the recurring theme of this post amid the talk of savage bears. The market comes back eventually.

Be confident that global capitalism will engineer the recovery. Stick to your plan.

Threshold rebalancing 

Switching to threshold rebalancing instead of annual rebalancing is another sound move when investing in a bear market.

At its simplest, you’ll trade asset classes that have drifted 10-20% off from your pre-set asset allocations. 

It’s a classic ‘sell high, buy low’ technique that requires you to ship out some of your best performers and scoop up armfuls of the stuff nobody wants. 

Emotionally it’s hard to do. You must steel yourself to take action, like a football manager cashing in on an aging club stalwart whose contract is up. 

Threshold rebalancing is more sensitive to market movements, where annual rebalancing may see you miss out on a golden buying opportunity if the bear market is short-lived.

The downside of threshold rebalancing is it requires you to look at your portfolio more often during the bloodbath. That is a bad idea for some.

Why investing in a bear market makes sense

The other thing you need do is stay invested. As The Investor counselled in his bear markets strategies piece written during the Global Financial Crisis:

What too many investors do instead, is get out of the market completely after the bear market strikes.

Like this, they crystallise their losses, and risk missing out on the stock market’s recovery.

Don’t beat yourself up if the market continues to fall. 

Going back to the savagery of that 1972-74 UK crash, the market only entered bear territory in August 1973 – some 15 months after the first sign of trouble. 

It was 40% down by the end of Jan 1974. 

Many people would assume that made UK equities a screaming buy. 

But they’d have to endure another 21% dive in March.

Then watch as a further 37% was lopped off from May to September. 

All before a final, jarring, minus-18% elevator-drop floored them in December 1974. 

The real return loss from top to tail was -73%. 

You’d need the forebearance of a saint to take that on the chin. 

But your faith would have been rewarded. As Global Financial Data explains:

The best time to have invested in (UK) stocks over the past 327 years was at the end of 1974 when the index rose 127.68% [99.6% real return] during the next year. This was also the best time to invest for the next ten years (30.64% annual return), 20 years (20.39% annual return) and 30 years (16.11% annual return).

Keep calm and carry on investing

Finally, one last reason to believe that falling stock markets can be a good thing.

One of the best-known market valuation metrics is the Shiller CAPE3:

  • High Shiller CAPE ratios are correlated with low future returns (over the next ten to 15 years) because investors overpay for company profits
  • Conversely, low Shiller Cape valuations imply strong future returns

Here’s a chart of the relationship based on the US stock market:

This chart shows that low stock market valuations imply strong future returns

Source: Michael Kitces, Nerd’s Eye View. 

  • High valuations (red bars) portend low future returns 
  • Low valuations (green bars) auger higher returns 

Bear markets slash stock prices, which lowers the Shiller Cape. That in turn suggests better times lie ahead. 

It’s far from guaranteed but there is a relationship between undervalued markets and future returns.

That is one of the reasons stock prices bounce back so forcefully in many of the charts we’ve seen today. 

Just as overbought, euphoric markets light the fuse on their own destruction, oversold, depressed markets sow the seeds of recovery in the loamy ashes of defeat. 

You don’t need fancy market timing moves in a bear market. What you need is resilience, patience, and belief.

Take it steady,

The Accumulator

  1. What would happen is the price of suddenly-safe equities would be bid up until their expected returns were just a little bit above what you get from cash and bonds. After this one-time gain, equity returns would be mediocre going forward. But luckily for we poor strivers, that’s probably never going to happen. []
  2. I used the remarkable Nikkei return calculator from DQYDJ. []
  3. Also known as Shiller P/E or the cyclically-adjusted P/E ratio. []
{ 56 comments… add one }
  • 1 Bob June 28, 2022, 11:34 am

    An interesting read and a useful reminder to basically keep calm and carry on, and in time, things will get better. Thanks.

  • 2 Neverland June 28, 2022, 12:15 pm

    * Obviously this doesn’t apply to crypto which is underpinned by noting except blind faith and hot air

  • 3 AtlanticSpan June 28, 2022, 1:04 pm

    Another great read thank you.
    I have a dilemma, I have just reached pensionable age with a fair bit of cash sitting in the bank. In January,I sold 50% of my stocks and bond holdings with the intention of using it to buy a retirement home. Unfortunately, due to unforseen illness,I cannot proceed with the purchase. I still hold 25% of my portfolio in a Global index fund, and 25% in an intermediate term gilt index fund. But now that my circumstances have changed, I would like to reinvest the money withdrawn earlier this year,but with such high valuations and the prospect of further large falls in the market to come,I am unsure what to do. Even Pound cost averaging at my age (66) does not seem so attractive.
    I realise timing the market is the wrong thing to do, but may have to,but via a Vanguard Lifestrategy 40 Fund which I feel will offer me least risky route back into the market once again. I would greatly value yours, or your readers views on investing for older people in difficult market conditions. Thank you very much.

  • 4 never give up June 28, 2022, 2:12 pm

    Phew! I’m glad the bear is just depicted on a graph in your opening drawing, as opposed to sinking, burning or stealing the rowing boat of the little man from the “FI in Ten years: a plan” series.

    This bear feels different to me compared with what came before in 2020 and that steep fall at the end of 2018. I’ve learned from this last couple of months though that I’m more scared of high valuations than I am of the fall itself. Although if we matched that -74% downturn I may may need a lie down and a tape of soothing animal noises, doves cooing, cats purring, that sort of thing.

    The one disadvantage (although first world problem) of aggressively pursuing FI is the worry that historically I’m piling into the markets during a relatively bad/peak time (seen when zooming out of a graph in twenty years time). I think I’d feel more comfortable if they stayed down for a couple of years and we have a ‘proper’ bear rather than chasing all-time highs again in six weeks time.

    I’m very much conscious though that I wouldn’t feel this way at all when I’ve finished earning and am then living off of the pot. I have work to do to ensure I’m more comfortable here, and re-reading this post every now and then sounds like a good start.

  • 5 weenie June 28, 2022, 4:47 pm

    A great post to help keep us all calm!

    “not a safe haven like bonds”

    Are bonds still considered safe these days?

    I’ve shifted some of my bond allocation to defensive ITs like Personal Assets, RIT Capital, Ruffer and the like – still not sure it’s been the right move or whether I will shift them all at some point, but I feel a bit more comfortable.

  • 6 The Investor June 28, 2022, 5:41 pm

    @Weenie — Have you looked at what those investment trusts hold? In as much as they are defensive, it’s primarily because they too hold US/UK government bonds (and cash), alongside some bits and bobs one might consider defensive such as gold. 🙂

  • 7 Financial Samurai June 28, 2022, 5:46 pm

    I sure as hell hope that the bear market doesn’t last 50 years!

    I’m banking on a recovery in the second half of this year has inflation peaks and interest rates moderate.

    By the way, are you guys interested in getting a hard copy of my upcoming book, Buy This, Not That: How To Spend Your Way To Wealth And Freedom? It’s coming out July 19, 2022 with Penguin Random House.

    If so, please shoot me an e-mail! I’ve been reading your work for over 10 years now. Funny how time flies.



  • 8 Peter June 28, 2022, 8:08 pm

    I too, like Weenie sold my bonds but with that difference that I’ve sold them all and bought stocks instead – they are cheaper now.

    I rather take bigger risk (Or do I really considering I have over decade investment horizon?) by being 100% in stocks then hold doubtful (not always working as it should) unprofitable insurance which are bonds.

    As for the rebalancing during classic (by classic I mean where bonds are negatively correlated with stocks) stock market downturn:

    Instead threshold rebalancing, it maybe would be better to actually sell all the bonds that are usually up and buy cheap stocks? I know one increases it’s portfolio volatility this way but on the other hand what a great upside potential it creates. Just imagine 50/50 portfolio in 2009 and someone decided to shift into 100% stocks. Even if you do not know the exact bottom, you could still have some fixed threshold rule to make the move.

    I would like to contribute more to my portfolio, the more stocks go down but I don’t have more money to follow this strategy. At least I have a very secured job which becomes even more secured during economic downturn.

    Good luck to everyone and please do not sell your equities or I will buy them 🙂

  • 9 JDW June 28, 2022, 8:24 pm

    A reassuring read. Just.keep.going.

    @never give up – this is exactly why pound cost averaging and regular investing comes into its own. Of course I worry as a newish investor seeing my pot decrease but also with a long-ish timeframe, I still consider a bear run as a ‘sale’. Just wish I had a bit more cash to buy, and keep buying.

    @Atlanticspan – this blog and the writings of TA, TI and guests are always excellent, informative for education purposes, general musings and great insights from the community (indeed, discovering this blog and others like Weenie’s have literally been life changing) although I would be cautious asking for and expecting personal advice, nor should they give it out. See https://monevator.com/disclaimer/

    Im sorry to hear about your personal situation. Your best bet would still be seeking out professional advice tailored to your situation. There’s a more info at https://www.unbiased.co.uk/

  • 10 ZXSpectrum48k June 28, 2022, 9:15 pm

    I really don’t see the point of trying to go defensive with closed end funds like Personal Assets, RIT or Ruffer. You can replicate these yourself. It’s cheaper and you have far more flexibility.

    Your options are really a) find a hedge that has a genuine negative correlation and actually diversifies (which isn’t going to be gold or bonds in a stagflation scenario) b) increase cash to reduce beta or c) stick with 60/40 (or 70/30, 80/20 or whatever) and wear whatever pain may or may not occur.

    Personally, I was hoping for sub 3000 on the S&P or even 2500. I’m a bit concerned here that the slew of bearishness from retail and all the media articles means we might have hit a local base. The taxi driver index was roofing it about a week ago. It’s not as though stagflation is some nailed on reality and, even if it is, it’s not as though it’s not priced to some degree. I hope this bear market extends for another year or two but the stats are against me.

  • 11 The Investor June 28, 2022, 9:36 pm

    @AtlanticSpan — I’m sorry to hear about your illness, and the unfortunate need to make new decisions at a difficult time. As others have said, we really can’t give personal advice. This isn’t just for legal/selfish reasons (though that has to be in the mix) but also because even if we were professionally qualified financial advisors — which we are not — we wouldn’t have anything like enough details to offer informed input.

    All kinds of things you don’t mention would be part of the equation, from any pension arrangements or otherwise, your family situation, dependents and conversely anyone who may be able to support you, the nature of the illness, insurance plans you have or haven’t got, your motivations for buying a retirement home versus renting going forward, lifestyle and typical budget, flexibility within that budget, legacy aspirations, time horizons… and even this is a partial summary. 🙂

    I hope this doesn’t come across as unhelpful — it’s hugely flattering that someone would come to Monevator when thinking about their future.

    However I am trying to give you an indication of all the various moving parts that need to be factored into figuring things out.

    It is extremely easy to find someone on the Internet who will reply to you “hey bear markets are buying opportunities so now is the time to get in and sort out your future” and someone else who might say “no, a depression is coming, sell everything and put it in gold” and everything in-between.

    But those aren’t great answers. They are easy answers, who knows one of them might be right, but they’re not great answers for you.

    I’d suggest doing a lot of thinking about the factors I’ve mentioned and others, getting independent financial advice paid for by the hour if you can find a good one, and doing a lot more reading and thinking.

    The good news is you have some liquidity by the sounds of it, which means you have options. I wouldn’t be in a rush to lose that. I know inflation is biting away at cash, but it can wait while you figure out where you’re going and the best way to get there.

    Good luck!

  • 12 Bill June 28, 2022, 9:43 pm

    My imperfect decision was to switch my savings from a roughly equal split between pension and ISA, to all pension.
    My firm offers up to 70% salary sacrifice (and they share the employer’s NI saving) so when the value falls I can at least take comfort in acknowledging that I am/was saving more in taxes.
    I still hope to do something interesting in a couple of years time that is outside of the City, but full on retirement is still the best part of a decade away.

  • 13 miner2049er June 28, 2022, 10:35 pm

    @ZX why? “I hope this bear market extends for another year or two but the stats are against me”

    I can guess but economics/finance is not my talent, but I would love to read your opinion

  • 14 Meany June 29, 2022, 12:30 am

    Ruffer are still around +5%YTD, they allocate 15% to “illiquid strategies and options”. I don’t know how to buy that bit! (I have modest overlap with their listed stuff) Presumably they have been gaining on currency moves through that. Will they lock in the gain? Are they only useful if the same currency moves continue?

    Usefully Uncorrelated Hedge Funds for us punters? If they are currently on a 10-15%premium, we’d lose our shirts the second the market snaps back, right?

    For a pens/isa portfolio, where I can’t just earn bank interest for a few months, which is the best partner for the sliding shares out of: flat cash, absolute return, gold, short linker fund, ?

  • 15 The Investor June 29, 2022, 8:31 am

    Uncorrelated Hedge Funds for us punters? If they are currently on a 10-15%premium, we’d lose our shirts the second the market snaps back, right?

    @Meany — As is often flagged up by Monevator readers, the Brevan Howard macro trend following vehicle (Ticker:BHMG) is one option worth keeping on an active investing radar. It’s an investment trust giving access to a hedge fund, and as you flag though it’s currently on an 11% premium. I find that very hard to take, though if the market trends down for a year you’d probably continue to be glad you owned it.

  • 16 ZXSpectrum48k June 29, 2022, 9:21 am

    @miner2049er. I tend to get paid more in volatile times (and while volatility can be both bullish and bearish, it tends to be higher in bearish moves). So I’m likely to get paid more and I’d have more to invest. So I’d like to be able to buy everything cheaper. There is nothing worse for those in jobs or who are young, than a market that just trends higher for ever. We need both bull and bear markets. It just doesn’t work otherwise.

  • 17 weenie June 29, 2022, 9:23 am

    @TI – yes, I am aware of whats in these defensive trusts; don’t hold any gold myself so happy with that and happy that the gilts/bonds are somewhat diluted in comparison to what I was holding.

    @ZXSpectrum48k – as @Meany has mentioned, some of the defensive IT’s holdings can’t readily be replicated, plus I’d have no real idea of the weightings and would have to keep track of any changes to allocations. Most of my portfolio is passive so happy to pay for someone to actively handle this small part of my investments.

  • 18 John Kingham June 29, 2022, 10:20 am

    @ZX – “Personally, I was hoping for sub 3000 on the S&P or even 2500”

    2,500 is about fair value for the S&P 500 according to CAPE. However, anchoring bias says we’re unlikely to get there from almost 5,000 in the blink of an eye. It takes time for people to lose the degree of optimism younger investors had these past few years.

    I have no idea if it will fall to 2,500, but we haven’t even begun to see the economic fallout from 10% inflation and normalised interest rates, so you might get your wish if the next couple of years are as unpleasant as some think they could be.

  • 19 ZXSpectrum48k June 29, 2022, 10:36 am

    @meany. Re: Ruffer is up 4.61% ytd in GBP terms. GBP/USD has moved 10% lower, so in USD terms, Ruffer is down 5.79%. You’d have done far better just holding a USD deposit. You have to be honest about your returns and that means accurate return disaggregation. One key part of that is explicitly seperating FX returns from asset returns.

    Ruffer is around 33% Gilts and USTs – easy to replicate. It’s biggest single holding is the 50-year inflation linked Gilt. It’s 50% equities – easy to replicate – and how exactly does that hedge your equity portfolio? A few percent in Gold – easy to replicate since Ruffer just owns SGLN. Fees on fees right there. The rest is CDS. So you are paying 1.0-1.2% charge for the 15% you cannot replicate. Which is essentially 7% on that 15%. And they say hedge funds fees are high …

  • 20 Passive Investor June 29, 2022, 10:44 am

    Really nice post. I particularly liked the analysis of pound cost averaging the sum of 3% of the portfolio through the 70s bear market. It’s a great ‘real world’ illustration – cuts through annual returns / losses data. This is what I’ve always tried to do through thick and thin but I’ve never seen any figures presented this way. Shortening the recovery time is a great way to think about things and a good diversion from not looking at your portfolio too often. Many thanks.

  • 21 AtlanticSpan June 29, 2022, 11:27 am

    Thanks so much to those of you who replied, and for the links supplied.
    I have much thinking to do.
    Kind regards.

  • 22 xxd09 June 29, 2022, 12:34 pm

    Just my penny’s worth as a 75 year old -18 years retired investor
    You seem to have the right ideas as an amateur investor ie equities in a global index tracker and your other monies in bonds(though personally I would use a global bond index tracker also)
    You can’t stay out of the market in cash unless you have prodigious savings
    I suggest you add your extra money to your equity and bond parts of your portfolio
    £100000 in a 60/40 equity/bond portfolio produces £3000+ pa as a rough guide
    Can vary Asset Allocation from 70/30 right through to 30/70 depending how well you cope with volatility and being able to sleep at night!
    More bonds -sounder sleep!
    Keep 2-3 years of living expenses in cash
    ie 2 index tracker funds and a cash fund
    That’s it
    Simple cheap and easy to manage
    Works for me-been 32/63/5 equities/bonds/cash for all my retirement

  • 23 The Accumulator June 29, 2022, 12:41 pm

    @ never give up – yes, it’s one of investing’s ironies that early to mid-stage accumulators should welcome a savage bear, whereas it’s a nightmare for deaccumlators. I like your soothing tape idea – maybe should also include a snorting bull on the charge.

    @ Atlanticspan – this piece includes a few ideas on getting back in when you’re sitting on a large lump sum:

    @ Weenie – Sure, bonds still have a role. They’re cheaper than they were and if these interest rates tip the economy into recession then stocks will keep falling but conventional government bonds could spike again. Of course, if it’s a stagflationary recession then they’ll both be kyboshed. Short-term index-linked bonds should do a job in that situation.

    @ Meany – this piece might be helpful:


  • 24 tom_grlla June 29, 2022, 2:14 pm

    @zx I think you are overestimating the sophistication of your average investor. A lot of this stuff (e.g. individual long-dated inflation-linked gilts) I don’t think people wouldn’t feel confident buying. Though I agree that PNL is pretty easy to do (pretty much Fundsmith, TIP$ ETF, Gold ETF, Cash).
    On the one hand I take your point about one doing better this year holding UST over Ruffer, but on the other, isn’t this a bit Hindsight Capital? I’m not a great fan of Ruffer – I respect them, but think they got a bit too big & unwieldy – but they’ve done what you’d hope they would this year i.e. provide positive GBP returns to people whose liabilities are mainly in GBP at a challenging time for markets.

    @weenie – the only thing I’d add is that personally I see RIT Capital as much more aggressive/equity-like than the others & I don’t feel it belongs with CGT/RICA/PNL or BHMG as a ‘Bond proxy’.

    @Investor – BHMG has had an amazing few years, but as you say it’s on a hefty premium & I think people should research it seriously before investing, as it’s a complex story e.g. it struggled in the mid-10s and it’s hard to know why – the official story is because of the lack of volatility, but I would suggest that at least part of it was due to the company management & culture (which seems to have improved since Landy took over) plus competition. There is a danger that some of this may repeat itself e.g. Macro fund does really well & a number of traders use their record to leave & set up on their own, leaving the Macro fund stuck.

  • 25 BBBobbins June 29, 2022, 3:17 pm

    Feeling a bit flakey myself at the moment. Was at a point last year contemplating that end of this year might be my moment for RE. But probably was too greedy in holding onto an equity mix in pension accounts (on my logic that I held medium term cash and some realisable property so actually most of it would still need to perform for a 5/10+ year horizon). Could almost certainly still go and survive but there is something comforting about holding on to an income stream in the current gloom. Real question then is what do I set as metrics for an uptick sufficient to execute? And I know there are no absolutes there. Thinking maybe after 50% recovery of the fall from peak value but then the nag is do I need to factor in extraordinary inflation. From 100 peak say the trough is 80 so if it recovered to 90 I could consider signs healthy enough. But in a year of 10% inflation should I really be rebasing recovery of peak at 110 and thus aiming for 95?

  • 26 The Rhino June 29, 2022, 5:52 pm

    Am I allowed a wry smile at xxd09’s comment on ‘more bonds, sounder sleep’ in light of 25% losses (VGOV and IGLT) or thereabouts since the initial post COVID peak two years ago?
    I’ve found the key to not worrying about your portfolio is to have a litany of more pressing worries to hand.

  • 27 Naeclue June 29, 2022, 6:00 pm

    What a comprehensive article!

    To summarise – stick to the plan. Accumulators should be happy to be able to invest at lower prices. Decumulators should do whatever was previously planned in the full knowledge that a bear market was very likely to come along at some point. Going off piste and buying some so-called defensive and expensively managed IT or disinvesting when the bear hits is unlikely to be a good long term strategy and accumulators/decumulators should both be investing for the long term.

    We are in decumulation and for rebalancing our approach now is to only sell equities when we are overweight, not to buy when underweight. Historically just drawing down on the cash/bonds has worked well compared to conventional rebalancing when bear markets have dragged on for many years, but has detracted from returns in short bear markets. Personally I am happy to give up the gains we might make by buying equities in short bear markets for the extra protection in long bear markets, so come January, when we rebalance, we will not be buying equities. Chances are, for the first time, we will not be selling either.

    This rebalancing approach is I think psychologically easier as you are never going to feel that you are throwing good money after bad. Accumulators should stick to conventional rebalancing though.

    We also only hold cash for the “safe” asset instead of bonds for similar reasons to the above – cash has historically worked better in the (less frequent) scenarios where bonds fall in nominal terms, as they have in this bear market.

    @AtlanticSpan, market falls can come at any time so don’t use that as an excuse not to invest. The chances of not being able to buy at a lower price than the one you invest at are actually quite low, so don’t worry about getting it wrong! The best thing for you to do is to try and work out a long term financial plan and then to implement it. Don’t pay any attention to what you, I or anyone else thinks is going to happen to asset prices in the future. We are all clueless, although some people have yet to realise how clueless they really are.

  • 28 MRoberts June 29, 2022, 6:53 pm

    It’s worth remembering that cash is an investment too. Maybe it doesn’t earn much (especially in an age of depressed yields by central banks), but it offers a better return than losing money in stocks. I know a lot of people recommend staying invested while the stock market goes down, but I just don’t agree with that anymore. Riding it down can be absolutely devastating, especially if you’re within a decade of retirement. The market usually recovers at some point, but will it recover before you retire? I’ve switched to a trend-following strategy and moved into cash before the market started dropping. It’s pretty easy if you have a rudimentary understanding of technical analysis.

  • 29 xxd09 June 29, 2022, 7:32 pm

    Rhino-Thanks for your concern
    Actually use Vanguard Global Bond Index Fund hedged to the pound
    4.8%+ pa since inception in 2009
    Bonds are mainly for money you can’t afford to lose plus portfolio volatility reduction
    Done the job for me
    4.8% a bonus
    Equities seem to have done the portfolio growth albeit in a volatile manner!

  • 30 The Investor June 30, 2022, 12:23 am

    @Sam — It’s pretty crazy isn’t it? I still remember your first posts written in the wake of the GFC. And I linked to you just last week!

    Congrats on the book and thanks for the offer. I’ll drop you a line!

  • 31 The Accumulator June 30, 2022, 9:16 am

    +1 Naeclue’s comment.

    @ The Rhino – “I’ve found the key to not worrying about your portfolio is to have a litany of more pressing worries to hand.” That did make me smile. Right, I’m off to pick a fight with the neighbours.

    @ BBBobbins – one way to make yourself more comfortable in the early stages is to keep some paid commitments. Say 2 days a week?

    I don’t know if you’re basing your assumptions on a sustainable withdrawal rate, but I’m comforted by the fact that the historical record includes the 1970s. A much more comprehensive stagflationary bond/equity massacre than we’re currently experiencing.

    If retirees can survive that then we’ll probably be OK.

  • 32 ZXSpectrum48k June 30, 2022, 10:05 am

    @tom_grlla. I’d agree that RCP is not a defensive asset at all and I think PNL is pointless. Nonetheless, I do think though you are paying an awful lot of fees for the 15% slice of RICA that does something useful. RICA still has a positive asset correlation with equities (no surprise given it’s 50% of the fund). You are going to need a large chunk of it to make any material difference to your portfolio in a bear market, and the opportunity cost of owning that chunk in the bull market is high.

    That’s a one difference of many difference between RICA and something like BHMG. You can’t replicate BHMG with conventional equity or bond funds. BHMG has outperformed RICA by a very solid margin over the last two decades (and is ahead of the SPXT). Most important, is actually outperforms far more in the environments where conventional assets underperform. A clear negative correlation and high beta. That doesn’t make BHMG a good or bad buy, but it’s just a far superior hedge. Disclosure: I’m currently short BHMG as a hedge while some of my Brevan Master fund position is being redeemed.

  • 33 BBBobbins June 30, 2022, 2:27 pm


    Yeah thanks – it’s possible but would need to turn my role into something else probably and adjust to an idea of somewhat reduced freedom

    The extent to which the current inflationary environment and bear market is reflected in historic SWRs is of course on my mind. Some round numbers for simplicity but let’s take a scenario where someone entered drawdown with an overall portfolio of say 1m last year at 3% drawing 30k pa. If today’s valuation were 800k and they started drawing down they would start at 24k. Big difference on what essentially is an identical portfolio – might be most of a “luxuries” budget. I’m still trying to get my head round what that means for having a flexible attitude to what is your long term SWR in early years of drawdown. I think it is likely to be target the higher drawdown when accruing but be willing to draw lower if winds turn against you in early years.

    I know you’ve written about this flex before being valuable in itself when determining a personal SWR and my simplistic example probably validates that it is an important part of testing resilience.

  • 34 The Investor June 30, 2022, 3:45 pm

    @BBBobbins – I think the point you raise is entirely fair and I share your disquiet. As far as I’m concerned, sequence of returns has come up poorly for anyone who has retired in the last year or so — and in your scenario the simple answer is that the person who *needed* £1m to retire on SWR cannot do it on £800K and needs to wait / work more for now, or else implement a significant lifestyle cut and risk a poor outcome over the long-term.

    Me and @TA perhaps differ a little bit about this. On most things I’m more of a risk taker (active investor, interest only mortgage, often run low bond allocations etc) but on sequence of returns I think I’m more paranoid.

    The big difference to me is you can’t undo the past, and we know that higher spending (high inflation) from a smaller pot (stock market correction) has been nailed on for the past year or so. So personally I’d play it safe.

    The very valid flipside is you only live once, and if you end up working an extra three years for nothing (either because the market roared back or because, sadly, you didn’t live to outspend your money) then the extra work and worry was for nothing.

    There’s no easy answer, which is why Sequence of Returns risk / drawing down a portfolio is often described as the hardest problem in personal finance.

    Here’s something I wrote back in March when this was all become clear for this year, in case you missed it:


  • 35 Naeclue June 30, 2022, 4:40 pm

    @BBBobbins, Someone retiring a year ago on £1m, drawing £30k can take an inflation adjusted £30k this year even though the pot may now be only £800k. That’s what SWR means. That implies that someone retiring this year on £800k, with all else being equal to the person retiring last year, can also take an inflation adjusted £30k.

    On the flip side, if the pot had risen to £1.2m, last year’s retiree can ratchet their SWR up to £36k as that is what someone retiring now in equivalent circumstances and attitude to risk would take.

  • 36 BBBobbins June 30, 2022, 7:21 pm


    Thanks. Rationally I know that’s what SWR means but emotionally in short term volatility it’s hard to get your head around. If as you suggest SWR can “safely”(using the term with usual caveats) be applied to the peak valuation then surely one shouldn’t be rebasing that to a new peak post drawdown because that implies harvesting upside without bearing downside which may ultimately make the Sustainable part challenging?

    We all know adverse sequence of returns is the biggest risk we face and hopefully we’ve built resilience into our plan. We can’t all avoid retiring into a bear market but what I am really pondering is how much the known known of a bear market should weigh into our thinking.

  • 37 Valiant June 30, 2022, 11:17 pm

    @xxd09 More bonds=sounder sleep.

    This absolutely is *not* my experience since I invested directly in bonds (VGOV) at the start of this year. I lost my nerve last month and crystalised a £60k loss.

    I’m 61, retired, wasn’t too bothered but have been persuaded by Mrs Valiant to build a new house at original budget £600k which is already up to £950k! I have about £350k in cash to pay for it over the next 15 months but am going to have to be selling another £600k of assets (I’m 78% in global trackers, 11% index linked bonds, 11% gold) in a falling market :-(.

  • 38 xxd09 July 1, 2022, 1:05 am

    Gosh Valiant-that’s a tough scenario!
    For more context on my remarks
    I am 75-retd 19 years
    On retiral I had a large enough pot for a SWR of 4% to maintain my lifestyle with a very conservative portfolio of 3 index trackers only split 30/65/5-equities/bonds/cash. Fortuitously I happened to be 3 weeks in the Arabian desert with no communications over the 2008 debacle which demonstrated/reinforced to me “staying the course” was a good plan. All had returned to normal by my return
    How to cope with a downturn-take a holiday!?
    Slept well at night ever since after that lesson in an admittedly rising market
    Even now as everything including bonds fall I see no reason to change tack
    Overall portfolio down about 9% but two years living expenses in cash plus those bonds to fall back on
    Hopefully things may be better by then
    So far bonds continue to do what they were supposed to do -decrease volatility of portfolio and let me sleep at night!

  • 39 miner2049er July 1, 2022, 8:26 am

    @ZX thankyou for replying to my post, I wonder how many that gain during the volatile period sit waiting for the cycle to come along so that they can make one last nice final gain to allow them to retire :).

    tongue in cheek this bear might be my fault, I was planned to FIRE next month, but last year I said to the Mrs, I’d like a dip to test the spreadsheet numbers so that we aren’t firing on a high followed by a low and the numbers don’t work….. Although the spreadsheet says we still ok we decided for the fabled “one more year” a nice redundancy package January2023 would be sweet though just incase the genie that was listening last year is still….

    My simplistic notes I have for my fire plan are, during a bear:

    ## money
    * Leave portfolio alone don’t panic
    * Live off emergency cash /bear cash
    * Any new income invest in the stock sales

    ## to allow sleep at night
    * Reduce living costs (although a sensible swr should have this covered in the first place)
    * consider getting a part time gig
    * don’t keep looking at finance news/portfolio

  • 40 The Accumulator July 1, 2022, 8:39 am

    @ BBBobbins – I’m guessing you already know this but I’m gonna flesh out the bones of Naeclue’s answer. Partly for anyone reading who wonders what witchcraft he’s using and partly because I always struggle with the ‘too good to be true’ aspect of this as well:

    – SWR’s are predicated on worst case historical scenarios. Typically when the market was richly valued.

    – The vast majority of retirees could have used a higher SWR than the historical minimum. Because they weren’t part of the 1967 cohort, or didn’t retire the night before the Great Depression etc. Those higher SWRs correlate with lower market valuations.

    – Lower valuations after a market slump imply you can use a higher SWR than before.

    – Mathematically both retirees are in the same position. So a retiree on £800K must be able to draw the same income as his £1 million predecessor. Mr 800K benefits from a higher SWR path born of a lower market valuation.

    – On the flipside, if I’m still only taking 3% from £1.2million then I’m OK to take £36K if that SWR holds in the future as well as the past.

    But not so much if some unlucky SORR causes me to rapidly withdraw 5%, 9%, 14%+ of the portfolio’s balance every year to maintain inflation adjusted income. That’s setting course for a death spiral.

    On the one hand, most retirees who stuck to the letter of the SWR law would die with plenty in the bank.

    On the other, we don’t know if the historical SWR will hold. We know high inflation is dangerous for decumulators.

    So I wouldn’t live quite so close to the edge as Naeclue.

    I retired close to a market top. In your position I guess I might well have gritted my teeth and ploughed on for a few more years.

    As it is, I’m finding that picking and choosing projects I enjoy is a freedom in itself. The pocket money trickling quiets the brain pixies that might otherwise have tormented me with SORR related mischief. And once a project is done, I skip off to play, happier than if life was just one long beach.

    Knowing what I know now, I’d still be happy pulling the trigger in the face of this bear market. I just couldn’t have known it until I got out!

    On the balance of probability: I’m probably not a member of the set of unluckiest retirees of all time. If I am, there will be other ways out of it.

    Sorry, if that was just a load of burble. Just thinking out loud really and trying to offer another perspective to anyone who’s grappling with this.

  • 41 Naeclue July 1, 2022, 11:52 am

    @BBBobbins, I endorse everything @TA has said and I was oversimplifying. The message though is unchanged in that the SWR of someone retiring now should be the same as for someone who has already retired, with all other circumstances being equal (same age, financial circumstances, health, etc.). So taking the simplistic view that 3% is fine, if the market rises it is fine to take 3% of the current portfolio value. However, the risk of running out of money with a particular SWR does not remain constant as market valuations fluctuate. So although 3% can be considered “safe”, it is safer when valuations are low and less safe when high (empirical evidence supports this). It follows then that a better approach than simply ratchetting up the SWR as markets rise is to try to take valuations into account when initially choosing and subsequently revising the SWR. Ideally this should be done when markets fall as well instead of ploughing on regardless with the initial SWR.

    The difficulty lies in how to go about choosing and revising the SWR. It can get quite involved and the calculation subject to a lot of uncertainty anyway. A simpler way might be a heuristic approach. If the size of your portfolio is up 20% in real terms, your initial SWR of 3% would have shrunk to 2.5%, so bank half of the gain and increase SWR to 2.75%.

    I should say that we don’t automatically jack up our spending when markets rise. We retired about 10 years ago (sort of!) and chose an SWR of 3% at the time. Mainly due to a combination of very favourable sequence of returns and underspending our SWR was 1.7% at the start of this year (it will be higher now). The SWR will never fall below 1.7% as we choose to give away the excess as markets rise. Giving away money is a form of increasing spending though, so we could do that instead. We have also started to improve our monitoring of spending and try to better estimate future spending, which also feeds into the annual revision of SWR.

    Life throws bricks at the best laid plans anyway, so it pays to expect change and be flexible. eg one of our daughters has very recently been diagnosed with MS, which is something we will factor in to our thinking.

  • 42 Naeclue July 1, 2022, 12:00 pm

    There are increasing numbers of people retiring on DC pensions and other savings with only the state pension as guaranteed income. We have recently come back from holiday with a group of friends who are retiring within the next few years and they are struggling to get to grips with how to work out and manage spending in retirement. They are all reasonably well off yachties with decent sized pots, so the conversation was more about how much could they afford to spend on bucket list type things than on day to day living, but it is not a situation they have had to deal with before. It is going to be interesting to see what happens as increasing numbers of people have to live off their savings. I wonder whether we might see significant swings in the economy if retirees increase and rein in spending as the size of their retirement pots fluctuate in value.

  • 43 BBBobbins July 1, 2022, 12:20 pm

    @TA, @naeclue

    Thanks. Your extended posts articulate more completely what I was getting at in my attempts to be brief and keep it simple.

    The concept of SWR is really just a tool to assess our capital vs our future anticipated (guessed at) income needs. There is an attraction to me in trying to match up to the 3% as best as possible as it is reasonably conservative. In reality I suspect my main interest in using it to set a monthly draw is not that we would overdraw but to give ourselves “permission” to spend up to that level without worry. Part of the adjustment of going from saver to spender (& I note that @TA has not yet really undergone this transition because of the sidegigs ;))

    My possible real underlying fear that we’d turn off some luxuries like travel unnecessaily when market headwinds looked bad and as a result end up in expensive shrouds.

  • 44 Naeclue July 1, 2022, 12:36 pm

    @BBBobbins, your approach to SWR is very much similar to ours. We initially took 3% as a guideline budget, not a spending target! Also, more something to be cognizant of should we exceed rather than a strict limit. As things turned out I don’t think we did exceed 3%, but that was because certain big ticket expenditures were planned for and managed separately from the 3% (we had another budget for them).

  • 45 Learner July 2, 2022, 1:08 am

    @Naeclue #42 specifically – that might explain the popularity of residential rental investment, replacing pensions which are no longer available and annuities which are unattractive or unheard of. I know a lot of people who intend to have renters fund their retirement (once the property is mortgage-free, obviously). It’s an easily understood and accessible income generator, with the added benefit of capital gain.

  • 46 Phil Pogson July 8, 2022, 1:10 am

    Love reading your articles.
    I’m still really confused about bonds this time around as they have tanked just as hard as stocks and at the same time. I now question the doctrine of bonds being the buffer during stock downturns. It just does not seemed to have followed suit this time.

  • 47 The Weasel July 8, 2022, 9:59 am

    @Phil Pogson – I’m as confused as you are.
    In my mind, from what I read everywhere, the risk with bonds was the opportunity risk, the profits you missed by not putting that money elsewhere, but then you got the stability in return.
    That doesn’t seem to be happening now.
    In fact, in my particular portfolio, VGOV is the one position that is in the red as we speak, by 12%+. All other equity ETFs I’m invested in like VHYL, VFEM, VEUR are down yes, but still green.
    If I was in the decumulation phase I’d feel cheated.
    Anyone cares to chip in as t what we’re missing? Is this just a case of us being so lucky as to be hitting the tail end of the risk distribution of bonds?

  • 48 The Accumulator July 8, 2022, 11:31 am

    Hi both,

    Bonds don’t always work. Historically they’ve failed to counterbalance falling equities about a third of the time in the UK on an annual basis:


    The UK’s historical record shows conventional government bonds typically take a beating during an inflationary crisis.

    But we haven’t experienced one of those in over forty years so people have overlooked it.

    We’ve been advocating for broader diversification for a while:

    Though a lot of remedies rumoured to work against high inflation don’t:

    A few observations:

    Nothing in investing works all the time. There’s always the danger events do not play out as expected. Hence investing is risky. Even bond investing.

    If we tip into a severe recession that chokes off inflation and causes the economy to contract – everyone will thank god for their conventional bonds.

    Rising bond yields are inflicting short-term capital loss on bond holders but simultaneously creating the conditions for bonds to pay greater returns in the future. This is a good thing if your time horizon is long enough.

    You’re right, Weasel, to draw a distinction between decumulators and accumulators.

    Speaking as a decumulator, bond pain is the price I’m paying for diversification. I’ll continue to put my faith in diversification over anyone’s ability to predict the future.

  • 49 Valiant July 8, 2022, 11:36 am

    @The Weasel I too have been burnt by VGOV. Having never invested directly in Gilt ETFs before I bought some at the start of the year. I abandoned them last month a crystalised a loss of tens of thousands. NEVER again.

    I am in the decumulation phase. I don’t feel cheated exactly – I do have free will, after all! – but a bit frustrated that I listened so readily to those experts such as Lars Kroijer who made it all sound so simple, and haven’t updated their channels for ages.

  • 50 DavidV July 8, 2022, 1:03 pm

    @Valiant (49) My recollection of the Lars Kroijer investing approach is to temper the volatility of your global equity tracker with *short-duration* government bonds in your own currency, provided they have an adequate credit risk. VGOV unfortunately cannot be regarded as short-duration. I use IGLS (0-5 year Gilts) – of course this is also down over the last year, but not to the same extent as longer-duration ETFs, and its returns will recover more quickly. The flip-side naturally is that during the good years for bonds, IGLS returns were comparatively low.

  • 51 The Investor July 8, 2022, 2:28 pm

    People really get confused by bonds. We see it again and again.

    Even now I see readers not learning the right lesson, IMHO — that when there’s a range of possible outcomes, sometimes the less likely things do happen — and instead they are writing things like “never again”.

    You should never say never again as an investor:


    That aside, I’m going to try to illustrate yet again what happens with bonds moving off a low rate environment into a higher rate one.

    Let’s say you hold a single gilt – UK Treasury 2044 3.25% – which you can see detailed here:


    This gilt will mature in 22 years. When it does so, you’ll get £100 back (the face value of the bond).

    You’ll note from the Hargreaves Lansdown page however that the gilt is currently priced at £109.65.

    This means you are GUARANTEED to lose capital if you buy this bond today and hold it until 2042.

    You buy it for £109.65. Between now and 2042 – with ups and downs along the way – the price will reach £100.

    So why would anyone buy it?

    Check again at the bond name, which includes its coupon (/interest rate) of 3.25%.

    This means it will pay 3.25% every year. Monevator readers will quickly spot that is much higher than what you get in the bank right now — and gilts are considered equally risk-free in terms of credit risk.

    So we have a situation where you will earn above market interest for 22 years, but we have a baked-in capital loss.

    We reconcile this with a concept called Yield To Maturity (aka Redemption Yield). The YTM factors in the capital erosion over time, as well as the coupons paid and (presumed reinvested) in that bond, in this case 3.25% until 2042.

    See this post for more:


    The easiest thing to do to get the YTM is to use an online calculator like this one:


    If I plug in the numbers above, I get a YTM of 2.67%.

    This *estimates* that if I bought this bond, reinvested the coupon, and redeemed it in 2042 (for less than I paid for it, remember) then I would have earned an annualized return of 2.67% over the 22 years.

    It’s an estimate because you don’t know exactly what prices you’ll be able to reinvest the coupon between now and 2042, because bond prices fluctuate.

    So. We can see that buying this bond guarantees a capital loss. We can also see that it’s a positive investment (in nominal terms) provided its held to maturity and the coupon is reinvested.

    This is why AAA bonds are considered risk-free investments. You can literally work out and know your return when you buy your bond. Totally different to a share, which can do anything.

    Now, between today and 2042 all sorts of things can happen. This bond is currently priced above its face value, but you can see on the Hargreaves link above that many nearer-term bonds are now trading below face value. Those bonds bought today will in contrast deliver a modest capital uplift on redemption.

    Say interest rates were to rise to 6%. Would you be very excited about a bond paying 3.25% a year? Probably not, and nobody else would be either, so the 2042 bond would sell down until its YTM rose more in line with those prevailing 6% rates AND the market’s expectation of the path of future rates.

    But crucially, those who bought today and held throughout would expect to still get something like their 2.67% YTM we saw. And those who buy at lower prices can expect a return in line with whatever their YTM was when they bought.

    Different return from the same bond. Because what is differing is the price you pay.

    Okay hopefully that is fairly easy to follow with a single bond.

    Now we move onto bond funds. It’s much harder to wrap your head around the above procedure with a bond fund, but basically exactly the same thing is happening with the aggregate collection of bonds your fund holds. There’s no magic edge available* in UK government bonds — it’s a super deep market with trillions looking for mispricings. So you get a smooth ‘yield curve’ and buy regardless of specifics.

    UK government bond funds were priced according to the near-zero interest rate world until late last year. This means their yield to maturities were very low (but still positive). Now rates are up and expectations have risen, too, at least for the next couple of years, before dipping again.

    This means government bond funds have repriced, because the underlying bonds have repriced.

    But all those underlying bonds will eventually go on to deliver a return as outlined above. It will be very low if you bought last year. It will be higher today.

    Bond funds are a bit different because they sell bonds to maintain their target duration. This means they don’t buy and hold to redemption.

    There’s no anti-free lunch going on here though. Remember the yield curve is universal, so bond funds are continually exposed to a snapshot of that changing yield curve, if you see what I mean.

    You can’t escape such market oscillations. In this case, government bonds have sold down for exactly the same reason equities have — expectations of higher interest rates (and perhaps inflation, though bond people get cross if you say that, I think because it’s double counting because that expectation is baked into the rate expectations).

    Hence both bonds and equities have had a crap year so far.

    If expectations shift away from higher rates, perhaps because of fears of global slowdown or recession, then rates could fall and bonds (/bond funds) rise while equities continue to falter.

    On the other hand if growth takes off then equities could do well, rate expectations climb, and bonds continue to fall.

    Or we could muddle along for a while longer.

    IMHO we’ve been through a one-time correction in bond pricing to get us off the near-zero bound. This doesn’t mean bond prices won’t continue to fall (as above I say they certainly could if rates continue to climb) but this ‘regime change’ that I’ve been speaking about since the start of the year is why we’ve seen both equities and bonds fall in tandem.

    Finally, you might say with the benefit of hindsight all this was obvious and we should have been shouting not to buy bonds.

    But it wasn’t obvious, except in hindsight. I could point you to Monevator reader comments saying we were irresponsible making the case for bonds as far back as 2011.

    I think I tentatively wrote that the bond market looked like it might be turning in 2016, so I haven’t exactly been Mystic Meg either.

    The Accumulator actually timed his unease pretty well with this article from late 2021:


    But even then he didn’t say ‘sell bonds’, because nobody knows the future.

    Instead, he talked about a range of more proportionate actions you could take:


    I’d read those pieces again.

    Hope this all helps, but suspect it won’t. 😉

    *There may be a tiny edge in trading old bonds versus new ones if you have billions or leverage, but it’s tiny, just makes the market more efficient, and is beyond the scope of this comment.

  • 52 Valiant July 8, 2022, 3:08 pm

    My interpretation of what Kroijer said was to buy gilts with maturity in line with your investment horizon. I’m 61 so am investing over the next 14 years (to age 75 when my SIPP will be assessed again under current rules). By coincidence the average maturity of the VGOV holdings is 14.7 years.

    Of course I may have completely misunderstood! But it has cost me very, very dearly this calendar year.

  • 53 DavidV July 8, 2022, 4:38 pm

    @Valiant (52) You’re right. In addition to using short-duration bonds, Lars Kroijer has also talked about matching durations to investment horizons. It left me confused as I could never determine what my investment horizon is. Straightforward examples of paying for a one-off event at a fixed time do not help when you are in retirement and want to decumulate or preserve capital for future unknown events. Even if you can determine an investment horizon, as you have done with the LTA assessment at age 75, the problem is that any bond fund matched to this duration will continue to have a similar duration as time progresses (as TI explains above) and so will drift beyond your initial investment horizon. Only individual bonds can avoid this.

    I am in retirement with adequate DB and state pension income. I had consolidated various DC pensions into a SIPP. I left this money in cash for several years earning zero interest while I procrastinated. In the end I could not bring myself to invest in intermediate bonds, and at the beginning of this year split most of the cash between IGLS and TI5G (0-5 year TIPS hedged to GBP). My equities are mostly in my ISA as I wanted to minimise volatility in my SIPP in case I eventually buy an annuity. I did similar with a smaller amount of cash that had built up in my ISA. Of course, I also now wish I had stayed in cash a little longer, but have the reassurance that the short duration should mean my losses are recovered relatively soon with increased coupons as maturing bonds are reinvested.

  • 54 xxd09 July 8, 2022, 5:43 pm

    Investor-great article on Bonds-very clear
    My practical tuppence worth @76 ret 18 yrs
    Bonds are mainly to reduce volatility in a portfolio
    Some growth occurs as a bonus
    Bonds are for the money you cannot afford to lose
    Alternatives to bonds ie to balance the very volatile growthy part of your portfolio the equities- is a constant demand from investors
    Everything else gold,commodities,REITs etc seem to be complicated expensive and difficult for the amateur investor to understand
    I used a 5 year gilt ladder for some time -a lot of hassle -used a Vanguard global bond index tracker hedged to the pound for many years now-one fund only,cheap and easy to understand
    It has done the volatility job with over 4% growth pa
    I made my pile at retirement and opted for a conservative portfolio ie 32/63/5-equities/bonds/cash(2 years living expenses)
    Everything worked so far!
    Times like these test us all but basic principles don’t change
    It’s a very long game so stay the course and all will work out

  • 55 Valiant July 8, 2022, 6:17 pm

    @xxdd09 please can you spell out which vanguard global bond index?

  • 56 xxd09 July 8, 2022, 8:36 pm

    The one I use is Vanguard Global Index fund GBP hedged
    It is an OIEC ie index fund not an ETF
    I use it in Accumulation format

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