Don’t Just Look at the Stock Market, Pay Attention to This Instead

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FIRECracker
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The US Stock market has been so volatile lately, it’s like a toddler on Krispy Kreme’s. Screaming one minute, giggling the next, and nothing anyone says can get it to calm down.

This is why we don’t try to time the market. If you’d sold on April 4, after the S&P 500 crashed 6%, you’d have lost out when it rebounded 9.5% on April 9. Then trying to get back in, you’d have lost more money again when markets crashed on April 10.

As terrifying as the stock market volatility is, no one is looking at the bond market, which is way scarier because what happened there recently is much more consequential, and arguably the reason why Trump blinked last Wednesday and put a 90 day hold on tariffs.

It’s not surprising. I mean, compared to stocks, bonds are boring. Most people’s eyes glaze over if you mention the words “10-year Treasury Yields” at a party. (unless it’s a FIRE party, in which case, nerdgasms abound)

Bonds are like the old boiler in your basement. Stable, predictable, and mostly ignored until they suddenly have a meltdown, and then it’s financial Armageddon.

That’s what happened last week, as bond yields on the 10-year US Treasury bonds briefly spiked up to 4.5% and only came back down after the announcement that tariffs would be paused.

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Why does this matter?

Bonds yields are the puppet strings behind everything—your credit card interest, student loans, car payment, and mortgage. Bond yields have an inverse relationship to bond values. When values rise, yields fall and vice versa.

A sharp spike in yields means bond values fell, because of a large selloff of US Treasury bonds. And when this happens, debt gets a lot more expensive, which is bad news not just for individual mortgages and loans, but for the national debt. Financial Armageddon happens when the interest on government debt is so high, nearly every dollar in taxes goes to paying off the interest.

So why did this happen?

There are a few theories on why this happened:

  1. Margin calls causing investors to sell bonds to cover them
  2. Inflation worries, driven by tariffs
  3. China, a large holder of US bonds, selling them as retaliation to the recent tariffs
  4. Loss in confidence in the US as a safe haven for global capital

Whatever the reason, the US treasury bond selloff, even scared Trump, who just the previous week went golfing despite the stock markets plummeting.

Here’s what he said:

“The bond market is very tricky, I was watching it,” Trump told reporters. “The bond market right now is beautiful. But yeah, I saw last night where people were getting a little queasy.”

He went from insisting “MY POLICIES WILL NEVER CHANGE” to backtracking and putting a hold on tariffs for 90 days, because not only would a spike in bond yields increase the interest on the national debt, it would also affect mortgage rates, of which his real estate empire is built on.

The stock market always gets the biggest headlines, but it’s the bond market that runs the world.

No wonder James Carville, Bill Clinton’s political adviser once said, “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”

So, what’s the takeaway from all this?

Well, after retiring for 10 years and investing since 2008, we’ve gone through enough financial calamities in the market (2008 –Great Financial Crisis, 2015 -Oil Crisis, 2018 – Government shutdown, 2020 – The pandemic, 2022 – Ukraine invasion), to know that panic selling and trying to time the market is never the answer. A globally diversified portfolio paying dividends and interest, with a cash cushion, helps you sleep a night without worrying about the underlying value of your portfolio. It’s easy to call yourself an investor when everything is going up, but what separates amateur and veteran investors are bear markets, like this one.

Here are a few additional lessons we’ve learned from surviving past bear markets:

Avoid debt like the plague

If you’re on Team Own, pay off as much as of your mortgage as possible. Debt is a ball and chain that drags you down. In times of economic uncertainty, don’t add fuel to the fire by having to shoulder a mortgage while worrying about job losses. Trump wasn’t afraid of the stock market crashing, because he knows it’ll eventually recover, but he was terrified of spiking interest rates for debt.

Team Rent, now is not the time to buy a house. Take advantage of falling rents, like we did in 2020. Flexibility is a superpower. I’d rather have a portfolio that pays me dividends and interest, than a house that traps my net worth, doesn’t pay me to own it, and costs a fortune to maintain.

Diversify, diversify, diversify

Buying the dip doesn’t work when you are investing in individual stocks, since that stock can go to zero during bear markets, as companies go bankrupt. But that doesn’t mean every single company in the index will. As companies fall off the index, they get replaced by new ones. This is why we invest in index funds and not individual stocks. Having a diversified portfolio has saved us in 2008 and many other market downturns and the same holds today.

The same goes for global diversification. When the S&P 500 was rising by double digits for the past 2 years, it seemed like going 100% US equities was a great idea. But now the tariffs are changing global trade as we know it. Countries are re-organizing and prioritizing less dependency on the US and trading with each other instead.  We don’t know exactly how it will all shake out, but being globally diversified mitigates your risk of only depending on the US.

Become Location Independent

Never underestimate the power of location independence. In was during 2008, that the World Schooling community was formed. Parents, who were worried about their income during the great financial crisis, sold everything to travel and educate their kids on the road. They started businesses online, enabling them to re-locate from a place with s high cost of living to a low cost one, while reducing their stress and allowing them to spend more time with their kids.

The less tied you are to an expensive location, the more you’ll be able to pivot and manage your expenses during a bear market. And who knows? You might already be FI and not know it or be more FI than you think.

What do you think? What are your backup plans during a bear market? Share your tips with other readers so you can help them get through this period of uncertainty.

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