Bond prices usually fluctuate far less sharply than stock prices. Occasionally, however, larger downward movements do occur on the bond market too. Only very rarely are these as severe as in 2022. In ETF portfolios with high bond ratios, it can take a while for the traces of such an exceptional year to fade.
The matter is actually clear: on the bond market, especially with government bonds of very high credit quality, things are usually far calmer than on the stock market. If the price of the ten-year German government bond rises or falls by one percent over the course of a day, that already draws particular attention. With stocks, by contrast, such movements are completely normal and hardly an "eye-catcher."
Stocks give you a stake in companies. They open up the prospect of higher return opportunities, but higher risks also have to be taken on in return. Bonds follow a different logic: provided the issuer remains solvent, they are repaid at the end of their term, like loans, with interest – which makes the risks lower than with stocks. The differences in the intensity of fluctuation therefore lie in the (risk) nature of the two asset classes.
quirion makes use of this in the investment strategies it offers. „By adding bonds to the mix, we want to make the higher return opportunities of the stock markets accessible even to those for whom a pure equity portfolio would not be suitable,“ emphasises Philipp Dobbert, Head of Asset Management at Quirin Privatbank and at quirion. „And for stabilising an equity portfolio, bonds are more reliable than any other asset class.“
The impact of the exceptional year 2022
The exception proves the rule, as they say. And in the history of the bond markets, the year 2022 was particularly extraordinary. A brief look back: inflation shot up, at times to over ten percent. The central banks responded to the development with rapid, sharp interest rate hikes. Bond prices then fell just as quickly and markedly. Older bonds were sold off in favour of new bonds with higher interest rates.
„The situation on the bond market has long since calmed down again, even if fluctuations remain somewhat more pronounced than before the interest rate turnaround,“ Dobbert notes. According to the general assessment, the peak in interest rates has now been reached. In anticipation of falling interest rates, bond prices already rose sharply at the end of last year. When bond prices rise, bond ETFs benefit. However: „It is precisely those who entered the market with high bond allocations shortly before the interest rate turnaround who need patience,“ Dobbert explains. „Because bond prices usually don't make huge leaps, it takes a while for the negative traces of the exceptional year 2022 to fade.“
Bonds as a risk buffer
The stabilising function of bonds, which has been reliable over the long term so far, can be illustrated with a comparison of the MSCI World equity index, the Bloomberg Global Aggregate bond index, and a mix of the two.
In this sense, at quirion bonds are meant above all to dampen the fluctuations of the equity portion in the portfolio. That is why the focus is on bonds with high credit quality and comparatively short maturities, which are particularly little prone to price fluctuations. In doing so, quirion uses a special combination of bond ETFs that give it a stake in bonds from around 2,900 issuers.
How high the bond allocation in your own portfolio at quirion is derives from the information that investors provide about their risk appetite and their investment horizon when opening a portfolio. „A change of strategy only ever makes sense when something about that changes,“ Dobbert stresses. „Even if prices occasionally make big waves in between: over a long-term perspective, such developments smooth out – on the equity market as well as the bond market.“
