WELL, THAT WAS INTERESTING! After a long stretch of generally steady growth, many investors forgot what normal volatility felt like. Over the past two weeks, the markets have been moving wildly as they seemed to be trying to price in an anticipated interest rate increase by the Fed.
Why would an interest rate hike affect stocks? There are many reasons, but one of them is the idea that traditionally less volatile bonds become more attractive compared to stocks as interest rates increase. Think of it this way… Would you own any stock at all if a government-backed treasury bond had lower volatility and higher returns? Probably not.
The reason people own stocks is partially answered by a term known as equity risk premium. This refers to the extra return earned by stocks in comparison to a risk-free investment. (While no investment is truly without risk, the short-term Treasury bill is often used in this comparison.) The formula is more complicated, but hopefully you get the idea that investors are trying to make their risk “worth it.”
A difficult truth of investing is that certain volatile investments tend to grow more than the less risky ones. The Wheeler Financial investment process continues to anticipate volatility and uses bonds to address your withdrawal needs for several years to reduce your reliance on the more volatile stock portion of your account when you need to take out money.