"Experience is the hardest kind of teacher. It gives you the test first and the lesson afterward." — Oscar Wilde
Last week, I analyzed nine main sector groups’ performance during the 2000 to 2002 and the 2007 to 2009 selloffs and saw that zero from the group had positive returns.
Today, I focus on bond fund candidates, submitted by readers that were sold as safe havens by their advisers. Why? To continue our theme to determine if they could be safe haven candidates for when the next recession or bear market comes into play.
I thank our readers for submitting these candidates. Unfortunately, it would take many months to analyze each one. Please note-not all submitted in this group are bond funds.
So, let’s analyze performance during the 2000 to 2002 and the 2007 to 2009 selloff, including the market ($SPX-green area), and the reader’s candidates: Fidelity Investment Grade Bond Fund (FBNDX-red line), Franklin High Yield Tax-Free Income (FRHIX-pink line), American Funds-Capital World Growth and Income Fund (CWGIX-orange line), American Funds-Fundamental Investors A Fund (ANCFX-purple line), Harbor Capital Appreciation Fund (HACAX-gray line), JP Morgan Large Cap Growth Fund (SEEGX-gold line), Fidelity OTC Portfolio fund (FOCPX brown line.)
During the 2000 to 2002 selling, the market ($SPX-green shaded area,) sold off 49.15%. While two funds in this group had positive returns in 2000, five funds had negative returns while three funds sold as safe havens underperformed the market at the time (October 2002) when the market bottomed.
Those invested in HACAX, SEEGX and FOCPX at the market top needed a 150% to 233%-plus return just to break even. Imagine the damage to one's portfolio to those owning these funds.
During the 2007-2009 selling, the market ($SPX-green shaded area) was down 56.70%. While two of these bond funds had positive returns in 2000, zero had positive returns in March 2009 when the market bottomed.
Those investing in CWGIX, ANCFX, and FOCPX at the market top needed a minimum of a 100%-plus return to get back to break even. Again, imagine the damage to one's portfolio for those overweight these funds.
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During both time periods, all funds but two in this group pummeled. This is a prime example that diversification works until it doesn’t. Remember, past results do not guarantee future results, so don’t just jump into any of these funds without the proper buy signals in place. I will be covering these system signals in later writings.
This performance data is extremely interesting, but the more important question is what are you planning to do with it? Here's what you should think about:
First, if you own bond funds, do you have their performance returns during these selling periods?
Second, if not, simply insert their symbols into a performance chart to see their returns.
Third, if you are not tracking your bond funds previous performance, then why?
If you have a managed account, you should already have this bond fund performance data. If not, simply request it. Then, ask for their safe haven gameplan for when the next bear market begins.
Profitable traders/investors make money with what they own and when they own it. If you want to learn more about the many tools and systems to better manage your holdings including how to calculate performance data, email me about my upcoming online training starting in 2020.
There is no better time than now while many indexes continue to make new all-time highs, to develop or fine tune your capital preservation plan and be proactive for when the next large-scale selling happens.
What’s next? I wrap up and analyze the highly popular bond funds used previously in my column in 2017, sold as a hedge for when equity funds hit the skids. The goal: To determine which securities may go up when the market goes down
This may be your first opportunity to make money when previously your portfolio tumbled. It is up to you if you want to learn how to not have that unnecessary, getting kicked in the gut feeling when the next bear market begins.
Plan your work, work your plan, and share your harvest!
DAVID O. ENGLAND is an investor/trader, financial analyst/educator/lecturer and Associate Professor Emeritus of Finance. This column is for educational purposes only and not intended as financial advice. Past performance does not dictate future returns. Questions? Send to firstname.lastname@example.org.