The stock market has been riding a roller coaster recently. Is there any way for an investor to protect against the downs of the stock market and still earn a decent return? N.C. State University economist Mike Walden responds.
“Well …, certainly there’s not a foolproof way, but one relationship that economists have long noted is a relationship between what’s going on in the stock market and what’s going on in the bond market, particularly with long-term bonds. If the stock market, for example, is going down because people are worried about the economy or they’re worried about some aspect of the world economy, particularly Europe, oftentimes … what you’ll see is the bond market will go up. That is to say, people will want to buy long-term bonds, particularly government bonds, because they feel they are safe. And what that means if you have already been an investor in long-term bonds, when more buyers want to buy those bonds, the price that you could sell your long-term bonds at actually goes up. So, in other words, you could make money on those long-term bonds.
“Now this is not a relationship that’s set in concrete, but we often see it play out in the financial markets. I think one implication of this … is that if you don’t have a crystal ball in the stock market, and I don’t know anyone who does, you may want to have a diversified portfolio that always has some stocks and some bonds, probably some other things also. But at least if you have stocks and bonds, you can take advantage of this relationship and the relationship is that sometimes, not always, when the stock market goes down, the bond market improves.”