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Staying Balanced Amid Market Volatility
The Case for Bonds
For those who needed an awakening to the glory of fixed income, the fourth quarter of 2000 provided a resounding explanation why the often-overlooked asset is needed in just about every portfolio.
It was a period in which the stock markets were rocked by the bursting of the Internet bubble, numerous earnings disappointments, uncertainty about the economy's direction and the protracted presidential election, among other things.
Reflecting that volatility, the Russell 3000® Index dropped 9.01% over the final three months of 2000. Some segments of the equity market were hit even harder; for example, the Russell 2000 Growth® Index plunged 20.2%.
Over the same period, the Lehman Brothers Aggregate US Bond Index gained 4.21%. And for the year as a whole, the index rose nearly 12%.
What's Been Driving the Bond Market
As always, lower interest rates were the main engine for the bond rally. Some sectors of the bond market got even more momentum from other trends, such as the federal budget surplus and the US Treasury's buyback of long-term government bonds.
This has created a shortage of long-term Treasuries and driven up the price of remaining issues. In fact, Treasuries were the best-performing sector of the bond market in the fourth quarter, when the Lehman Brothers Long-Term US Government Bond Index rose 7.43%. Many investors believe trends like the Treasury buyback might continue to provide support for the bond market well into the future.
Besides those positive trends, the bond market was boosted by the same uncertainties that drove down stocks in the fourth quarter and much of 2000. Investors tend to gravitate to bonds and other types of conservative investments, like real-estate investment trusts, when uncertainty casts a shadow on stocks.
The Benefits of Bonds
The relatively low correlation between the performance of stocks and bonds is one of the key reasons for adding a fixed-income component to a portfolio. Given how long and strong the bull market of the 1990s was, it's not surprising that investors would overlook the benefits that bonds offer. Undoubtedly last year's correction will lead many people to a newfound appreciation for the way in which bonds can balance a portfolio amid stock-market volatility.
Russell believes in combining multiple asset classes, managers and styles to create a balanced strategy for reaching your long-term goals. Fixed income is an integral part of that strategy.
For further information about these contents, please contact Russell Investments Canada Limited.
This is a publication of Frank Russell Company. It should not be construed as investment, legal, or tax advice. The contents are intended for general information purposes only, and you are urged to consult your own investment, legal, or tax advisor concerning your own situation and any specific investment questions you may have.
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