In recent months we have seen increased market volatility. During these moments we encounter clients, family, and friends who express their worries about the stock market based on headlines or general word of mouth. These worries are valid because, obviously, nobody wants to see their hard-earned savings decrease in value. It is certainly not a good feeling, but often times we see investors whose negative feelings overcome them in the wake of a few negative headlines and they react. But their reactions do not often reflect the reality of the situation. The reality being that rarely is a person’s money invested 100% into the stock market.
What does that mean exactly? Let us say this a different way. A majority of the time an investor’s money is also invested in the bond market. There are two markets that are relevant to this blog: the stock market and the bond market; the latter of which is significantly larger than the stock market. You may ask, what is the bond market comprised of? According to the Securities Industry and Financial Markets Association (SIFMA),[8] as of Q1 2017, the U.S. bond market size is broken down as follows:
|
Category |
Percentage |
|
U.S. Treasury |
35.16% |
|
Corporate Debt |
21.75% |
|
Mortgage Related |
22.60% |
|
Municipal |
9.63% |
|
Money Markets |
2.36% |
|
Agency Securities |
4.99% |
|
Asset-Backed |
3.51% |
|
Total |
100% |
You may notice right away that United States Treasuries makes up the majority of the bond market, with corporate bonds second. For example, in the case of the United States Treasury you are essentially acting as a creditor to the U.S. government. In the case of corporate bonds, you are acting as creditor to large corporations such as Apple. Being a creditor, you earn interest, and if the bond is held until maturity the principal investment is recouped.
This distinction is important to remember because a mixture of investments in the stock and bond markets balances your portfolio in a way that stabilizes your hard-earned dollars for future growth. So next time you see a headline about the stock market that makes you feel uneasy, remember that investing in the bond market as well as the stock market increases your ability to handle these gyrations and stay invested, which is more often than not your best course of action.