Read the weekly bond market commentary from Drew O’Neil.
October 15, 2018
The volatility in the markets over the past few weeks provided some excitement we haven’t seen in a while. Over a 4 day span a couple of weeks ago, we saw the 10-year Treasury shoot up about 20 basis points. Then last week, we saw equities fall by +5% over the course of a couple of days. Moves like this tend to lead to countless “the sky is falling” headlines. These headlines then lead to individuals asking themselves what they should be doing as a result of the recent moves and the corresponding headlines. The answer often depends on whether you are investing or trading, which are two very different things.
Trading takes more of a short-term point of view, where someone might attempt to maximize total return based on short-term market moves and opportunities. This tends to lead to a fairly active approach, where sharp market moves like we saw last week could trigger some sort of reaction.
Investing generally comes with a longer-term time horizon. Instead of looking to capture short-term gains or limit short-term losses like a trader might, an investor is likely sticking with a long-term plan to make sure they have enough money to support their current lifestyle, to retire in 10-years at a stated date in the future, or to make sure their grandchildren’s college funds will be fully funded 15 years from now.
With the recent market moves, a trader might have found it necessary to take action, as making the right/wrong call based on the sharp moves we’ve seen recently could “make or break” their month/quarter/year.
An investor is likely not going to take any action until their annually (or semi-annually, or quarterly, etc.) scheduled portfolio rebalance. When it comes time to rebalance 6 months from now, they will likely not even remember the early October volatility that dominated the headlines.
A trader positions based on what just happened or what they predict is about to happen in the immediate future. Positions are generally entered and exited over a relatively short timeframe.
An investor will reposition or reallocate based on changing market fundamentals and/or a change in personal goals, life events, or risk tolerance. These investments and allocations are generally held for a long period of time and tend to shift slowly according to a disciplined plan.
A trader might think they can “beat the market” because they have superior trading skills. If they outperform their benchmarks, they consider themselves a winner.
An investor does not care about beating the market, an investor cares about achieving their personal long-term goals. Whether they outperform or underperform an arbitrary benchmark does not affect their personal outcome.
A trader might buy an individual bond priced at 105 because they believe that due to some short-term market dynamics, the price is going to increase to 108 over the next month and they will be able to sell at a profit.
An investor will purchase a bond at 105 that is yielding 4%, knowing that it will mature at par (100) 10 years from now, because earning 4% annually over the next 10 years will help them achieve their long-term goals.
Market volatility can create excitement and action for traders, while for the disciplined investor, it may just be another day where the portfolio is performing exactly as it was intended.
To learn more about the risks and rewards of investing in fixed income, please access the Securities Industry and Financial Markets Association’s “Learn More” section of investinginbonds.com, FINRA’s “Smart Bond Investing” section of finra.org, and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) “Education Center” section of emma.msrb.org.
The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.