Bonds | Wells Gibson

Sitting Out an Equity Market Fall

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For many of our clients, the purpose of accumulating wealth in a portfolio is to provide a sustainable income either now or in the future that is, at the very least, able to cover their basic needs and hopefully a bit more.

The level of portfolio-derived income required is unique to each client.  Some of our clients have pensions from final salary schemes and possibly other income from other sources, such as property.  Other clients need to rely more fully on their portfolios.

Portfolio income comes from the natural yield that a portfolio throws off in the form of dividends from companies and coupons (interest payments) from bonds, and capital makes up any shortfall.  When markets rise, as they have done most years since the Global Financial Crisis a decade ago, portfolios may even grow after an income has been taken, although this will not always be the case.  When markets fall, it can begin to feel a little uncomfortable as dividends may be cut and equity / share values may be down materially, as we have seen in the first quarter of 2020 (albeit, the upturn in April has helped).

The cardinal investment sin at these times is to sell equities when they are down and turn falls into losses.  To avoid doing this, income required above a portfolio’s natural yield can be taken from bonds or cash reserves.

You first question might be, ‘How long might I have to do this for?’. 

The figure below, helps to answer this question.  It uses a range of regional (Europe, Asia-Pacific ex-Japan, Emerging and World) and major individual equity markets (US, UK, Japan) and plots the top 10 largest market falls for each and the time taken to recover back to the previous high, in, before-inflation terms[1].

Some overlaps obviously occur (e.g. the US is a material part of the World), but broad insights can be gleaned: most market falls recover within 5-6 years, some may take a up to a decade or so, and outliers can and do occur, such as Japan which took 27 years to recover (in GBP terms) from its market high in 1989.

Figure 1: How long will we have to wait?

Data source: Morningstar Direct © All rights reserved.

What is also evident is that, with the exception of Japan, these market falls all sat well within most investors’ true investment horizons.  Whilst Japan provides a helpful lesson that investing outcomes are uncertain, widely diversified portfolios do help to mitigate country-specific risks.  Even investors in their 80s should be planning to live to at least 100, giving them a 20-year investment horizon (today an 80-year-old woman has a 1-in-10 chance of reaching 98[2]).

The question of how much cash or bonds an investor should hold will vary depending on how important it is for them to meet their basic income needs and how important it is having more discretionary spending[3].  Using a sensible multiple of basic annual spending, and possibly additional discretionary spending, is a sensible starting point from which to reach a suitable minimum.  For those to whom certainty of income is critical this could be significantly higher and for those to whom it is less critical, it might be lower.  For all investors, it should be sufficient to ensure that they can sit out any market fall relatively comfortably, without having to sell their equities.

Sitting out an equity market fall is not so bad, when you know how long the wait might be and you come well prepared to sit it out.

As always please get in contact if you have any questions.

[1] MSCI World NR, IA SBBI US Large Stock TR, MSCI United Kingdom NR from Jan-72; MSCI Japan NR, MSCI Emerging Market GR, MSCI Europe NR, MSCI AC Asia Ex Japan GR from Jan-1988.
[2] https://www.ons.gov.uk/
[3] It will also depend on other factors such as their need to take risk, their risk profile, and their financial capacity for loss, all of which should be discussed in detail as part of the ongoing financial planning process.
Photo by Martin Zangerl on Unsplash

Our thoughts on bonds

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“You don’t need bonds, until you need them!”Anonymous

Challenging times

Today, investors face some challenging choices when it comes to investing in bonds, not least because yields on bonds are at historical lows and currently below that of UK inflation.  In response to the very low yield on bonds, some investors have been tempted to chase higher yielding bonds, in an attempt to squeeze some return out of what feels like an unproductive portfolio allocation.  This is, unfortunately, an accident waiting to happen.  The phrase ‘picking up pennies in front of a steamroller’ comes to mind.

Other investors, including clients of Wells Gibson are asking whether they should instead be holding cash.  This has been a theme, on-and-off, for almost a decade since the era of low yields began, driven by quantitative easing by the Bank of England in response to the Credit Crisis.  Those taking the cash deposit route over this period have paid a heavy price, losing 15% of purchasing power compared to just 3% from being invested in short-term government bonds.

The challenge is to make decisions today that will help to protect, preserve and create wealth over time and, most importantly, allow investors to remain invested in the markets at the worst of times.

Why own bonds at all?

As investors, it’s our emotional and financial ability to suffer falls in the value of our shares, which tends to determine how much risk we can take on. Very few investors have the stomach for a 100% global equity portfolio.

Investors who cannot emotionally, or financially, afford to suffer falls in the value of their portfolio have to reduce their allocation to equities / shares and own more stable and therefore lower returning bonds to offset these falls.

We should be looking forward to yield rises

At some point in the future, yields are likely to rise to higher levels.  The problem is that no-one knows when, how quickly and with what magnitude it will happen.  Investors should be looking forward to yield rises, because in the future their bonds will be delivering them with a higher yield, hopefully above the rate of inflation.

When yields do rise, bond prices will fall, creating temporarylosses.  At that point bonds earn an investor more than they did before the rate rise and they reach a breakeven point when the new higher yield has fully compensated them for the temporary capital losses suffered.  The time to break even is equivalent to the duration (similar to maturity) of an investor’s bond holdings.  Short-dated bonds with a three-year duration will breakeven after three years.


Bonds are a very important part of most portfolios, providing lower absolute levels of volatility than equities and protecting portfolios from periods of severe equity market trauma that occur from time to time.  Be prepared for unexciting returns as yields – potentially – move back to a more normal level.  No one knows when or how quickly this will happen, so don’t try to second guess the guessers.  Sit back and remember: ‘You don’t need bonds until you need them!