A reader asks for a continuation to an earlier blog post:

Do you have an inverse chart showing what bonds do when the market goes up (which happens much more often than when it goes down)?

Recently I looked at the historical performance of bonds when stock prices were falling:

In summary, bonds usually rise when stock prices fall – but not always.

High-quality bonds are a pretty good hedge against bad stock market years.

I’ve never looked at the other side of this question: How do bonds perform when the stock market rises?

Here’s a look at every positive year for the S&P 500 along with the corresponding 10-year Treasury yield since 1928:

Some investors mistakenly assume that there is a negative correlation between stocks and bonds, meaning that when stocks rise, bonds fall and when stocks fall, bonds rise.

But bonds have performed well during the stock market’s up years.

In fact, average yields on 10-year government bonds were higher in good years than in bad years:

Bonds are obviously far more stable than the stock market. The distribution of bond gains and losses has been similar during stock market upswings and downswings.

When the S&P 500 was positive, bonds had negative returns 20% of the time (which means 80% positive results).

When the S&P 500 was down, bonds had negative returns 19% of the time (which translates to 81% positive returns).

Average returns were similar and win/loss ratios were similar.

What does this tell us?

Bonds are quite good for diversification.

Of course, there are market environments where bond and equity correlations can hurt a portfolio. The most recent example was 2022, when both stocks and bonds fell in a rising interest rate/inflation environment.

Diversification works most of the time, but not always.

It is also interesting to look at the average gains and losses on the stock and bond markets.

The average up year for the stock market was a gain of over 20%, while the average down year saw a loss of over 13%. For bonds, the average up year was +7.1%, while the average down year saw a loss of -4.9%.

Bonds have also been positive overall for more years than stocks.

From 1928 to 2023, 10-year Treasury bonds ended the year with a gain 80% of the time, while the stock market rose 73% of all years during that period.

These numbers provide a good explanation for the risk premium inherent in the stock market. The stock market delivered more than double the annual return of bonds over the 96-year period from 1928 to 2023, in part because owning stocks entails higher risk.¹

On the stock market, profits are higher, but so are losses.

You cannot earn a risk premium without taking some risk.

The good news for diversified investors is that there can be a time and a place for both asset classes.

In nearly 60% of cases, stocks and bonds ended the year with gains at the same time. In 36% of all years, bonds ended the year higher than stocks.

In the long run, the stock market wins, but in the short term, this is not always the case.

Bonds are in positive territory most of the time, regardless of whether stock prices are rising or falling.

Not perfect, but fixed income remains one of the easiest ways to hedge the stock market.

We addressed this question in the latest edition of Ask the Compound:



My colleague Alex Palumbo joined us on the show this week to discuss questions about how to deploy a large portion of cash savings, how to diversify company stocks, how to evaluate financial performance and how to think about alpha when choosing a financial advisor.

Further reading:
The Holy Grail of Portfolio Management

¹The S&P 500 rose 9.8% annually, while 10-year Treasury bonds rose 4.6% annually between 1928 and 2023.