The very part of your portfolio that you may think is the safest and most predictable of all of your investments could in fact be setting you up for a nasty surprise. I’m talking about bonds … and bond funds.
Today we’re going to take a look at how the ultra-low volatility of today’s interest-rate based investments can lull you into a false sense of complacency … and how TradeStops helps prevent this from happening.
Interest rates have been dropping for more than 30 years now. Just take a look at this chart of yields on the 30 year T-Bond.
But what happens when there’s a shock to the system? Like in 2008?
Zooming in on the most recent 12 years of the above chart, we can see how dramatic the 2008 crash really was on T-Bond yields.
The first fund we’ll consider is TLT, the popular ETF that tracks the price performance of US Treasury Bonds with maturities of 20 years and above. Normally you would expect such a fund to have very low volatility. Right?
Here is a chart of the TradeStops Volatility Quotient (VQ) on TLT for the past 12 years:
All of this is to say that we shouldn’t get too complacent when it comes to the volatility of our bond funds.
Here’s another, even more conservative example. Take a look at CSJ, the ETF for 1-3 year maturities on investment grade bonds. The price dropped almost 11.5% during the financial crisis.
Even savvy investors can become complacent in today’s low interest rate and low volatility environment. We’ve set the floor for VQ at 5% to help our members avoid just such complacency and to not end up with too large of a position size in ultra-low volatility funds.
Right now, we’re in just such a period of low volatility. This low volatility could continue for a while longer, but when it does change, and it will, TradeStops helps make sure that you don’t get caught off guard by a bond villain lurking in your portfolio.