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I posted this as a follow-up question in another thread, but it more appropriately should be a separate thread, so here goes:
One reason often cited for not trying to time the market when it comes to stocks is that a large chunk of their gains comes during a small number of days. So if you’re on the sidelines then, you really miss out.
Is there a similar phenomenon with bond ETFs and funds? That is, do they tend to have big gains on just a few days? My guess is that their situation is different from stocks in this respect, but that’s just a guess.
Does anyone happen to know what history tells us?
Another factor, related to your post about MM funds vs. bond funds, is that if you’re “on the sidelines” in a MM fund you’re still earning 4% (right now).
I’m old enough to remember when MM funds weren’t paying bubkes. But now you can make 4% on the sideline which might enable you to either “wait for your pitch” if you like another investment; or to dollar cost average into your investment of choice (in this case bond funds).
Ben, I agree. Would this be called “pay to stay”?
Of course, the same is true of stocks. Theoretically, for my stock position to “make sense” it needs to make X% over 4% now. Frankly, as MM rates got high enough I started to wonder how I could justify being so heavy in stocks. Then of course 2024 they did like 20+%, but we keep flying toward the sun and I’m not sure if my wings are made of wax.
Bond returns are generally smoother and less volatile than stocks. Big one-day gains are much rarer, and historical data shows that bond performance isn’t concentrated in just a few days like it is with stocks.
So while it’s still smart to stay invested in bonds (to avoid poor timing and benefit from compounding), the “missing the best days” argument doesn’t apply nearly as strongly to bond funds. Their returns tend to accumulate more gradually over time.
Mark, thanks for the comment and that’s what I suspected.
For volatility in bonds, see
What’s the MOVE Index and Why It Might Matter? | Charles Schwab
From what I have learned, most investors are fearful and not happy when the bond market rallies. Imagine what would take for the bond price to go up. Yup, usually flight to safety when the stock market dives.
Quan, thanks for the link.