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May 29, 2009


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One premise here is that bonds and stocks always move in opposite directions at least unless you talk about government bonds and "flight to safety" that occurs during panics.

While this is often true, it is not always the case. When there is an expectation for future inflation, the stocks tend to go up while the bonds may go down. But at the same time, the variation in interest rates may cause stocks and bonds to move in the same directions: falling interest rates is good for both stocks and bonds (although bonds' going up sometimes precedes stocks going up) while rising interest rates is bad for both stocks and bonds.

Additionally, when risk increases both corporate/municipal bonds and stocks may move in the same direction like we've seen in 2008 when the credit crisis lead to fear of defaults.

Now, re-balancing into stable investments when the market is overheated does make sense. But one cannot do it without thinking about things like risk, interest rates, potential for inflation or deflation. Also "stable" investments aren't just bonds. CDs for example are also stable investments and their value isn't changing on secondary market.

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