Sentiment in the bond market is decidedly bearish, and the financial media has been filling the airwaves with yet another round of calls for the end of the bond bull market. Should investors heed their warning? Is it time to sell out of bonds? Or, could the argument be made that bonds are actually attractive in the wake of such a selloff? To answer this question, we will again look to history for guidance.
We established that in the last 90 years, bonds have experienced a similar or worse selloff approximately 3% of the time. That means out of 1,091 months, 33 experienced a larger loss. How has the bond market performed after these past drawdowns? Would investors have been well served to sell out of bonds to prevent further losses?
The answer may be surprising. If an investor had sold out of bonds after each of the 33 months, he or she would have avoided further losses over the next 12 months just twice. The average loss avoided would have been -1.83%. In the other 31 instances, he or she would have sold just as the market was again turning positive and missed out on an average return of more than 8%. History shows that November’s experience has actually presented some very attractive buying opportunities. As Baron Rothschild famously said: Buy when the market’s nose is bloodied… or something like that.
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