For those that are in retirement already or approaching retirement soon, the prospect of a bursting bond bubble and another hit to your personal retirement assets is enough to make you head for the hills! The past decade has proven to be quite volatile given two “stock bubbles”, a “real estate bubble” and a “derivatives bubble”. Now, with so much money flowing into Treasuries and interest rates so low, many are wondering if the next great event will be a “bond bubble” bursting!
While investors certainly need to be cautious and alert to the risk of investing in bonds today, do not to be misled by the media hype of another bubble about to burst. It would not be recommended for investors to avoid bonds entirely due to the “inflated” fears. While bond prices are relatively high and interest rates inordinately low, that is largely a reflection of the outlook for continued sluggish economic growth and restrained inflation in the near future.
Eventually, I believe that outlook will change and the Fed’s easy-money policy, budget deficits and spending in Washington, D.C. will have the potential to reignite inflation at some point down the road. But even if that eventually happens, it could take years for expectations and bond yields to reflect that scenario.
The phrase “bond bubble” conjures up visions of a meltdown the likes of stock and real estate markets’ free fall declines. But bonds have never had such a devastating collapse. Indeed, the worst 12-month loss for the U.S. bond market was merely a fraction of recent equity losses. Interestingly, although the values of bonds and bond funds do traditionally take a hit when interest rates rise, investors who own a bond fund or diversified portfolio of bonds should see their returns rise over time assuming they reinvest interest payments in new bonds paying the higher rates.
So what’s an investor to do?
The answer comes down to weighing the alternatives. You could easily avoid a possible bond bubble by selling out of bonds. But then where would you put the proceeds? Stocks or CDs?
The fact is this, although it’s easy to think that with interest rates so low they have nowhere to go but up, no one really knows what the future of rates will be, let alone the timing of any movements. Given that uncertainty and the lack of decent alternatives, you could consider maintaining your position in bonds but take reasonable precautions to limit the downside should interest rates rise.
What precautions am I referring to?
The bottom line though, is that timing the bond market makes about as much sense as timing the stock market…, none at all. So despite the cries that the bond market is about to blow, I contend it would be a mistake to pull entirely out of bonds. A more prudent way to go is to make sure your bond holdings are sufficiently diversified so your portfolio won’t be devastated should rates rise, and that it will also be in a position to benefit over time from higher rates.
For more information contact us at 845.563.0537 or Contact@CompassAMG.com
The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm. Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.
Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. No client or prospective client should assume that any information presented and/or made available on this site serves as the receipt of, or a substitute for, personalized individual advice from the adviser or any other investment professional.
Tags: bond bubble, bonds, Exchange Traded Funds, financial planning, high yield, investing, investment strategies, investments, mutual funds, portfolio, preferred stocks, retirement, retirement income, retirement plan, Retirement Planning, stocks, TIPs, Treasuries