At the start of 2019, few things seemed more certain in markets than the continued rise of interest rates. But the Federal Reserve lowered interest rates 0.25% today for the first time since the financial crisis in 2008.
This wasn't the first leg down for rates, however. Bond market yields had already begun to fall well in advance of the Fed's actions, the yield on the 10-Year Treasury Note ended July at just 2.02% after beginning 2019 at 2.71%. The 2.02% yield is the lowest month-end level since October 2016.
Falling interest rates have pushed up bond prices, and many investors have been surprised at the strong relative returns for bonds in 2019. The DFA Investment Grade Bond Fund (DFAPX) is +7.7% through July 31th. Even short-term bonds have performed well, the DFA Five-Year Global Bond Fund (DFGB) has gained +3.5% over the same period.
Are there lessons for long-term investors from this unexpected interest rate move and their surprising trajectory this year? I think so.
First, realize that short-term market movements in both bonds and stocks are largely unpredictable. The long-term average return on stocks has been about 10% a year, and over 12% for small-cap stocks, but just 5% for bonds. But in any given year the actual results can be quite different. Trying to predict short-term movements can be frustrating and introduce unnecessary emotional strain into your investing process.
Second, try not to be influenced by the financial headlines or predictions about what will happen to stocks and bonds next.
Finally, focus on what you can control--the list below is a good start--and stop sweating the things that you cannot. In doing so you might find that you can achieve a much better investment experience in the process.
If all of these things sound good in theory but hard to pull off consistently on your own, don't hesitate to reach out and see if Servo can help you become a more successful investor.
Past performance is not a guarantee of future results. Index and mutual fund performance includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses except where noted. This content is provided for informational purposes and should not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.