Selling Bonds and avoiding a bond market bubble has nothing to do with the downgrading of United States debt to AA+ by S&P. “Interest Rate Risk, Not Credit Risk, is Why You Should Sell Bonds” was the discussion of our last post.
Avoiding a Bond Market Bubble
The “herd mentality” has billions of dollars pouring into the bonds, and particularly Treasury Bonds. Baby boomers burned in the last decade by two bear markets in stocks and a housing price collapse are searching for stability and safety. After a 30 year period of falling bond yields and rising bond prices I’m afraid they have learned the wrong lesson.
Treasury bonds are supposed to be the ultimate safe investment. Many investors believe they are accepting a low return for safety, but actually they are accepting a low return and high risk. Bond yields are at generational lows, which mean bond prices are at generational highs. It will not take much of a rise in interest rates to send bond prices plummeting and safety starved investors heading for the exits all at once.
The Federal Reserve, in an attempt to avoid deflation and stimulate the economy, is artificially holding down interest rates. This is creating another bubble, this time in bonds, that the public is participating in. Billions of dollars have left equities and gone into bonds the last few years. This is an example of the middle class being duped into funding bad policies. The bond principal will be paid back with a greatly deflated dollar, and once again the average investor will have participated in another investment bubble.
Selling Bonds
One of the problems investors have in selling bonds is the long touted philosophy of financial planners to hold a fixed percentage in stocks and bonds that change with an investor’s age. This out-dated mode of thinking has damaged equity portfolios and could deliver another blow with a bear market or even a crash in bond prices.
A tactical asset allocation strategy is necessary in this volatile era. Prudent investors should pay attention to valuations and refuse to invest in areas where the potential reward does not compensate for the risk being taken.
The Arbor Asset Allocation Model Portfolio (AAAMP) currently has no allocation to bonds. The risks are too high given the low yield. In my next article “Sell Bonds and Buy Best Dividend Paying Stocks” I will look at how to replace a bond portfolio with other investments, including dividend paying stocks.
Do you believe there is a bond market bubble?
| AAAMP Blog by Ken Faulkenberry | |
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Ken Faulkenberry earned an MBA from the University of Southern California (USC) Marshall School of Business with an emphasis in investments. Ken has 25 years of investment experience and is dedicated to helping people with self-directed investment management through the Arbor Investment Planner. His asset allocation strategies have an outstanding performance record. |
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