Stocks and bonds both get clobbered this time. Here's why Stocks are down more than 20% this year. Usually when that happens bonds hold their value. But right now both are down sharply, hurting retirees and people saving for college in 529 plans.

Stocks and bonds both get clobbered this time. Here's what's behind the double whammy

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AYESHA RASCOE, HOST:

The stock market fell sharply again last week - down nearly 23% so far this year. And anyone with a retirement or college savings account is getting hit with a double whammy. Usually when stocks drop, bonds hold their value or even go up. Right now, both are getting clobbered. NPR's Chris Arnold explains.

CHRIS ARNOLD, BYLINE: Owning both stocks and bonds is a basic concept of investing. Stocks tend to make you the most money over long periods of time, but they're volatile. And bonds are more like the slow, steady turtle paying you a fixed, predictable rate of return. But this year, both stocks and bonds have been falling in value.

DEBORAH MCDANIEL: These last couple months have actually been really brutal.

ARNOLD: Deborah McDaniel is 69 years old and lives in Bremerton, Wash. She retired two years ago. She's got a mix of stocks and bonds in her 401(k), which she thought was the responsible and safe approach, but...

MCDANIEL: It got hammered down about, I want to say, like 25% over the last 18 months-ish.

ARNOLD: Laughing about it's easier than crying. But that's brought the value of her retirement account down from more than $500,000 to around 400,000. That's about all she has besides Social Security. So she finds herself thinking, if this goes on much longer...

MCDANIEL: Oh, maybe I need to find a job again at 69. Not something I'd relish doing.

ARNOLD: So here's what's happening. In normal times, bonds are safer investments than stocks. And not only that - their prices can rise in value when stocks crash. So they soften that blow. But not this time.

DAVID KOTOK: This is one of those rare years when both bonds and stocks work against the investor.

ARNOLD: David Kotok is the chief investment officer of Cumberland Advisors. He says usually, when there's worry about a recession, the Federal Reserve would cut interest rates to boost the economy.

KOTOK: But this time, the Federal Reserve has a different problem.

ARNOLD: Inflation is the problem, the worst in 40 years. So instead of cutting rates, the Fed is raising them to try to slow down the economy. So rates are rising, and that's what's pushing down bond prices. Rick Miller is an economist who runs a financial planning business outside Boston.

RICK MILLER: The reason that bonds drop in value is that interest rates rise.

ARNOLD: So, OK, here's how this works. Remember, bonds are those slow, steady turtles. So let's say you own a bunch of those turtles.

MILLER: Your turtles have numbers on their backs.

ARNOLD: Let's say they have twos on their backs because they're paying you 2% a year on your investment. They keep doing that, guaranteed. That's how bonds work. But new bonds are always getting issued. And so when interest rates rise, now people can buy bonds that pay a higher interest rate back to investors, say 5%. That's a lot more money. They're like faster, better turtles. So now if you want to sell your old ones, that's a problem.

Is it kind of, like, nobody wants to buy my crappy slow turtles?

MILLER: Well, they can buy those speedy, nifty, new five turtles. So why are they going to want your slow two turtle? And you could say, well, my turtle is still a nice turtle. It's a really cute turtle. But if you want to sell it, you're going to have to give them a discount.

ARNOLD: That is why your bond fund has fallen in value. Basically, you have to cut the price to sell it, or nobody wants it. But - and this is really important - your bonds, even though on paper the price is lower if you want to sell them - they're still paying you the same amount of money as before, say 2% a year on whatever you invested.

MILLER: Your turtle's not dying. Your turtle is not even sick, right? It's just a two.

ARNOLD: So one takeaway is don't panic and sell all your bonds. Just stick with your plan because someone like retiree Deborah McDaniel, if she was making $10,000 a year in interest income off the bonds in her retirement portfolio, if she doesn't sell them...

MILLER: It should still be generating $10,000 a year, that bond fund, that bond portfolio.

ARNOLD: Even if it's gone down in price, it still pays her the same amount of money. And that's reassuring to McDaniel.

MCDANIEL: It's good to know that my entire portfolio hasn't tanked.

ARNOLD: The problem for retirees, of course, is that many do have to sell some bonds in their retirement account to pay for expenses. So a lower price does hurt then. On the other hand, if you're still working and stashing money away, the bonds you buy now will be paying more money for years to come. Chris Arnold, NPR News.

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