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This is the worst year for stock and bond investors since 1969—here's what to do with your money

Jeremy Rice | Image Source | Getty Images

So far in 2022, both the stock and bond markets have posted serious losses. To find another market that looks like this one, you'd have to go all the way back to 1969, according to data from BlackRock.

The S&P 500 is down nearly 24% year-to-date, and the Bloomberg U.S. Aggregate Bond Index has surrendered about 16%. Should both indexes finish the year in the red, it would be the first time that has happened in decades.

And for investors who hold both stocks and bonds, that's not how a mixed portfolio is supposed to work.

"Normally, stocks and bonds have an inverse relationship," says Kevin Brady, a certified financial planner and vice president at Wealthspire Advisors in New York City. "Historically, bonds have had a ballast effect when stocks go down. That's not happening this year."

With losses piling up in the two most common asset classes for retail investors, "there haven't been many places to hide," Brady says.

Why it's been a tough year for both stocks and bonds

History shows that something pretty big has to happen for stocks and bonds to be down in the same year. In 1931, a currency crisis forced the UK to abandon the gold standard, and in 1941, markets were roiled by the U.S. entry into World War II.

The last year this happened provides the closest analog for what investors are seeing now. Rapid inflation in the mid-1960s forced the Federal Reserve to hike interest rates in an effort to cool the economy, much like what's happening today. The economy tipped into recession in 1969, which marked a year of negative returns for both stocks and bonds.

Financial experts are unclear on whether the present-day economy will slide into recession (or whether it already has), but the same forces are working on stocks and bonds. Fear among investors that the Fed's actions could cause a recession have driven many to sell their stocks, pushing prices down.

At the same time, interest rate increases have a material effect on bonds. Because bond prices and interest rates move in opposite directions, the Fed's moves have been eroding the value of bond portfolios.

"The Fed is deliberately raising interest rates to combat inflation, which is not generally helpful to your investing portfolio," says Steve Laipply, head of bond exchange-traded funds at BlackRock.

Bond investors: 'You have a lot more options'

It's impossible to know how the economy or monetary policy will shake out in the short term. Should inflation continue to run hot, the Fed could keep hiking interest rates, in turn pushing down bond prices.

According to many experts, who believe much of that carnage is behind us, now may represent a compelling opportunity for bond investors, says Laipply. "Most economists believe the Fed will succeed at cooling the economy," he says. "If you have this view, bonds look attractive. We haven't seen yields at these levels in years."

In years past, when interest rates were hovering near zero, investors had to buy riskier bonds to earn a reasonable return on their investments. But the recent rate hikes mean you don't have to look very hard anymore: a two-year Treasury, a short-term bond backed by the full faith and credit of the U.S. government, currently yields 4.45%. A year ago, a similar bond yielded less than half a percent.

Plenty of other types of bonds are offering high yields, too, which gives investors options to find different sources of return in their portfolios without taking on the higher potential downsides of riskier investments like stocks.

Stock investors: Buy investments on sale

As for stock investors, a 20% decline isn't all that out of the ordinary. In fact, it falls in line with what CFRA chief investment strategist Sam Stovall calls a "garden-variety" bear market. In the 10 times drawdowns of 20% to 40% have occurred since 1945, the market has returned to its peak after 27 months, on average.

In other words, this happens in the stock market all the time. And if history repeats itself, your stock holdings are likely to bounce back to their previous highs relatively quickly.

In the meantime, sticking with your long-term strategy and investing at a consistent clip ensures you'll be adding investments when they're trading at lower prices.

"If you have a well-laid plan going, you probably don't have to make any big changes," says Christine Benz, director of personal finance and retirement planning at Morningstar.

One change in particular you should avoid making after a year in which nothing in your portfolio was working: making big bets on what's been doing well recently. Selling out of your diversified portfolio in favor of recent high-fliers, such as energy or commodities investments is "a recipe for disaster," says Benz.

This article has been updated to reflect clarified comments about bond yields from Steve Laipply.

Correction: A previous version of this story misstated the name of the Bloomberg U.S. Aggregate Bond Index.

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