One of the best ways to lower stock market risk is by owning assets that go up when stocks go down.
What goes up when stocks go down? Treasury bonds and gold are the sectors that go up when stocks go down most often but there are a few more possibilities.
During bull markets, it’s hard to find information on what goes up when stocks go down but I found some excellent historical data after some digging. It’s like everyone wants to gloss over the reality of bear markets and related recessions.
You may be surprised by what really goes up when stocks go down on a very consistent basis based on historical facts so keep reading.
After personally investing for almost 40 years and finding this information very insightful, I’m excited to share this with you.
Here are 7 assets that go up when stocks go down frequently. Owning one or more of them during bear markets can benefit stock investors. These assets range from something as simple as cash to higher risk inverse ETF’s as you’ll see below.
What Goes Up When Stocks Go Down?
We’ve all heard that gold is the most common asset that goes up when stocks go down making it the best way to hedge against stock market crashes. This has not always worked in prior bear markets.
I recalled that gold did not go up when stocks went down in 2008, at least not in a clear cut fashion. My memory was that in 2008 gold was volatile as investors feared the demand for gold would be down on a global basis. In hindsight, it was more much complex as addressed later in this post.
Did Gold Go Up When Stocks Crashed in 2008?
Here is how gold performed in 2008.
Gold prices on January 1, 2008 $ 833.50
Gold prices on December 31, 2008 $ 880.15
Increase in price of gold 2008 $ 46.65
From the chart below, you can see that gold went up 5.6% in 2008 while the S&P 500 dropped 38.49% that year. This means that gold was an effective hedge against the stock market decline in the year 2008.
(Note: the prices above are based on 3 pm MT USA which explains the slight variations in my research.
Again, insightful gold investors did not have a smooth ride in 2008 and here’s why. During 2008, gold went as high as $1,003.20 on March 17, 2008 and as low as $722.70 on October 22, 200!
Nevertheless, gold was an asset that did go up when stocks went down for the calendar year of 2008 based on where it began and ended the year.
Here is an informative short video on billionaires who have used gold as a hedge. (I have no affiliation whatsoever.) But keep reading to see other assets that go up when stocks go down.
Why Didn’t Gold Go Straight Up When Stocks Crashed?
If gold is meant to go up when stocks go down, why was gold so volatile in 2008 instead of just going up?
For one thing, the price of gold is strongly affected by the US dollar which adds another layer of complexity.
Perhaps even more important, gold is a “source of funding for margin calls made on declining assets” as explained in this Seeking Alpha post by Plan B Economics. This leads gold to experience forced selling at times.
Much of the reason why gold was so volatile when stocks fell in 2008 was due to the borrowing and selling of gold on the market so banks could meet the required liquidity requirements during the financial crisis.
There is more about this paradigm in an excellent article I here for those of you who appreciate complex financial topics.
Gold Vs Stocks in History
The chart below shows how gold has gone up or down vs stocks over past stocks market declines since 1976.
The fact that gold went down when stocks went down in both the 1980 bear market and the 1998 stock market correction show that gold is not always negatively correlated to stocks.
Gold price movement was, however, negatively correlated in 6 of the 8 stock market declines of 19% or more since 1976.
Do Bonds Go Up When Stocks Go Down?
Bond investments are also considered a good way to offset stock market risk in a portfolio.
There are many different types of bonds ranging from highly leveraged risky bonds to Treasury bonds. Different types of bonds go up when stocks go down and vice versa.
Risky bonds tend to go down when stocks go down since investors become more risk averse during times of uncertainty.
On the other hand, US Treasury bonds almost always move opposite the stock market during bear markets. Therefore, they are used to mitigate market stock risk by most financial advisors using a standard asset allocation model with a long term investing plan.
Read my related post on how to avoid problems when hiring a financial advisor.
Did Bonds Go Up When Stocks Went Down in 2008?
The proof is in the pudding as the saying goes. We can look to see how bonds performed in 2008 by looking at the iShares ETF, TLT.
TLT is an index that represents the 20+ year Treasury Bond.
In 2008, TLT was up 33.76%. It’s worth noting, however, that TLT declined 21.53 in 2009. This supports the case for tactical investment strategies.
Why Do Bonds Go Up When Stocks Go Down?
Treasury bonds go up during bear stock market because investors flock to investments perceived as safe.
Also, remember bear markets are usually tied to the economy slowing.
And the Federal Reserve lowers interest rates when the economy slows to stimulate economic growth again.
A core investing principle is that bonds go up when interest rates decline. As a result, bonds usually rise when stocks go down. The timing of this relationship is not exact.
In fact, financial markets anticipate events before they happen as the large institutional “smart money” rushes to buy bonds in anticipation of lower interest rates.
This may sound complex, but it is very logical and simple when you think about it.
Here’s my video on how the economy affects stock prices.
Be forewarned that I was criticized on my YouTube channel by a viewer about my explanation on how the economy affects stock prices. I don’t pretend to be an economist. I am simply an investor seeking to understand investing so I can invest better, probably much like you if you’re here.
I use simple terms and big picture perspectives in investing and talking about money matters. I’ve noticed that this drives CPA’s crazy. 😊
Do Treasury Bonds Always Go Up When Stocks Go Down?
If only risk management were simple enough that every time stocks had gone down in the past Treasury bonds had gone up. They haven’t.
I created the chart below to show the years since 1969 in which stocks went down OR Treasury bonds went down to illustrate this point.
Regarding the chart, note that T bills return about the same as a money market fund.
T bills never had a year of negative performance from 1929 through 2018 so it is safe to say that cash (money market) is an asset that goes up when stocks go down, albeit slightly.
This is covered more in the Cash section below.
As you can see, in 1969 both stocks went down and bonds went down. This confirms the somewhat disappointing reality that U.S. Treasury bonds have not always gone up when stocks have gone down as is commonly believed.
And in 2018, Treasury bonds went down a tiny .02% while stocks went down 4.23%. This is hardly worth mentioning since the Treasury bond decline was so small, but it did discredit the assumption that stocks and Treasury bonds are always negatively correlated.
It is, however, safe to say that US Treasury bonds have a very high probability of going up when stocks go down, making ownership of them a legitimate way to offset stock risk for most bear markets.
Read my related post What Are the Risks of Bonds?
Stocks That Go Up When Overall Stocks Are Dropping
Consumer staple stocks tend to drop the less than other sectors during bear markets. This is because people need to buy certain things to live no matter what, such as toothpaste and food.
In the dot.com crash between March 2000 and October 2002, for example, consumer staples rose 1.2%.
During the financial crisis from October 2007 through March 2009, consumer staples fell a whopping 28.5% but much less than the S&P 500’s drop of over 56%.
Read my related post How Will a Stock Market Crash Affect You?
Stocks That Rose in 2008
Some rare stocks went up as the overall stock market fell in 2008. This is unusual since almost all stocks move in the same overall direction as the market.
Some of the stocks that rose sell products that can be considered consumer staples. Many of them made strategic corporate moves in 2008 that increased profits.
I recall from prior bear markets that the stocks of companies that sell very low priced products, such as Dollar Tree, tend to hold up better in bear markets.
This is because people who bought medium priced products before the related recession switch to lower priced products.
And low net worth consumers continue to buy low priced products.
For example, the following stocks went up in 2008 for various reasons.
- Ross Stores – ROST
- Walmart – WMT
- McDonald’s – MCD
- Dollar Tree – DLTR
- Hasbro – HAS
- Amgen – AMGN
- Gilead – GILD
- Celgene – CELG
- Budweiser – BUD
- AutoZone – AZO
- H&R Block – HRB
- Church & Dwight – CHD
It makes sense that these companies did better than most during the recession based on the market they serve, but again, several of these companies made strategic moves around during the bear market which increased their profits.
There were thousands of companies that served a similar market or sold products in the same sector that tanked during the bear market of 2008.
It’s also important to mention that after looking at the charts of these stocks, many of them had big swings up or down in the years before and after the 2008 bear market. So this wasn’t necessarily a slam dunk.
Read my post Stocks That Went Up in 2008 with details about why each stock above went up when most stocks were going down and the country was entering a brutal recession.
Cash Has Positive Returns When Stocks Go Down
Money market funds (cash) returns are positive when stocks go down. Since money market values do not fluctuate, the increase is usually minimal since it comes from interest.
Having an asset that goes up 2% can be a real life saver when stocks have gone down over 50%!
It’s easy to forget that cash (money market) is an asset class, and sometimes a darn good one at that.
In fact, in 2018, cash (FTSE 3 month T-bill index) was the best performing sector among intermediate bonds, municipal bond, corporate bonds, global bonds, high yield bonds, emerging market bonds and stocks (S&P 500 index).
And cash was the best investment among the asset classes of large cap stocks, REITs, large cap value stocks, small and mid-cap stocks, commodities and international stocks in 2018, too.
Before getting too excited about cash I must remind myself that inflation has averaged about 2% in recent years. Inflation in 2018 was 2.44%.
Considering this, cash would have delivered about slightly negative zero real return in 2018.
But in 2008, a zero real return would have thrilled most stock market investors.
Read my related post on cash allocation in a portfolio.
Your Own Assets
As you may have read here, I believe that one of the best ways to reduce investment risk is by owning your own assets outside of stocks and bonds because such assets can go up when stocks go down.
This has worked very well for us with both real estate rentals and online business.
While real estate values may go down when stocks go down, the demand for renting often increases since many people delay home buying. This can drive the price of rents up.
As for online business, the type of online business will affect whether this asset goes up or down in relation to stock moves. Many online businesses, however, will hold their value, if not increase in value and provide income during bear stock markets.
Read my related post Owning a Business Vs Real Estate.
There are two more assets that go up when stocks go down, but they are best for advanced investors or professional wealth managers only. As an investor, however, I think it’s important to be aware of them as many fund and wealth managers use these strategies.
Many investors who invest in funds and with wealth managers don’t realize they already own inverse funds or options in their accounts.
I am not against hedging strategies but I think it’s important to understand how your wealth is invested.
Stock Inverse ETF’s
Stock inverse ETF’s move in the opposite direction of the asset they represent. Many short ETF’s are leveraged, meaning they move two to four times opposite that of the underlying asset.
Inverse ETF’s are best for experienced investors who are willing to accept the risk that comes with them. While in theory inverse ETF’s make a lot of sense, it’s easy to get whipped around as market trends change. Plus, inverse ETF’s tend to be very volatile.
Many fund and wealth managers buy put options to hedge against drops in the stock market.
The value of these puts go up as stocks go down in value. Again, this makes a lot of sense as a way to hedge against stock market losses.
Cons of Using Puts to Hedge Stock Risk
The cons of buying puts to lower stock market risk are:
- You can get whipped around as markets change direction.
- Learning how to buy puts to hedge stock portfolio risk is a learned skill
- Options decrease in value as you own them due to time decay
- Buying puts to hedge is not as simple as buying a Treasury ETF to hedge
Pros of Using Puts to Hedge Stock Market Risk
The pros of using puts to hedge stock market risk are:
- Buying puts is not terribly complex
- Puts provide inexpensive insurance against stock market risk
- Puts are a very effective hedge against stock risk when done correctly
This is another strategy that is best only for proactive investors eager to learn how to use puts to lower portfolio risk.
Read my related post How to Reduce Risk While Building Wealth.
Summary for What Goes Up When Stocks Go Down
Now you have seen 9 assets that go up when stocks go down at least most of the time.
It’s important to understand how much investment risk you have at any given time and lower risk if you see it is too high.
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Disclaimer: Nothing in this post is to be construed as personal financial advice! This is for information only.
Thanks to these fantastic sources in addition to the sources linked above in article:
Stocks vs bonds in bear markets chart – Aswath Damodaran – http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
Chart with gold vs stocks – https://goldsilver.com/blog/if-stock-market-crashes-what-happens-to-gold-and-silver/