The Stale Market Blues

Nearly halfway through 2018, we are still flat in the markets. Sure, January was a rush up. But then February saw those gains wiped out in two weeks. Since that time, we've been bobbing back and forth but going nowhere.

There's also a continuing divergence between stock markets around the world. U.S., U.K. and European stocks are just barely positive; Japanese markets are barely negative. Basically, most developed markets are flat for the year.

In the meanwhile, Emerging markets are showing a particularly steady downtrend. Let's take a look at a few of their charts.

China A-Shares

Source: Yahoo Finance

MSCI Brazil

Source: Yahoo Finance

MSCI India

Source: Yahoo Finance

MSCI Russia

Source: Yahoo Finance

All the major Emerging markets are below the popular 200-day SMA and a few are well below that indicator.

If lackluster stock performance were the only problem, maybe investors would be pretty happy. After all, in prior stock declines in recent history we saw the bond portion of the portfolio increase.

However, this year longer term bond performance across the board has been negative. Here are the Year-to-Date performance numbers for a few popular bond ETFs in Canada.

XBB.TO:  -0.82%
VAB.TO:  -1.08%
HAB.TO:  -0.21%

At the same time, short term bonds have actually grown a bit this year. In this rising rate environment, short term bond ETFs might actually be setting up for solid future performance as they are rolling over their holdings at increasingly higher interest rates on their notes.

XSB.TO:  +0.11%
XSH.TO:  +0.18%

Moving Forward With Your Portfolio

I believe the direction we are seeing here emphasizes the benefits of short term bonds over longer term bonds when it matters. No one cares if your bonds go up when your stocks go up because your entire portfolio is moving higher with the more growthy, more volatile stock elements.

However, when stocks are falling, you want your bonds to be stable and that stability is best delivered by short term bonds. We are not even close to a "crisis situation" in the stock market, but it's often psychologically satisfying to have a portion of your portfolio moving up at any given time.

This is one of the benefits of Leveraged Barbell Portfolios. When bonds, particularly short term bonds, make up the majority of your portfolio, you automatically worry less about the stock side. Even when those stocks are leveraged up 2x or 3x. Your stocks deliver the growth when the market provides it, but you systematically peel away profits and stash those profits into super-safe bonds.

So how do you deal with a stale market? You pick a long-term strategy that is proven to work. You choose elements of your portfolio carefully so there is nearly always something rising in value. You recognize how your chosen investment strategy should perform in a wide variety of market conditions, including these wobbly stale markets. You stick to your long-term plan and ignore the daily headlines. You check your account balances less often. You focus on what you can control: spending, saving, and strategy.

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