Bond Investors Beware
We have been waiting since Trump took office for bonds to fall, and it looks like the prophecy is finally coming true. Majority of investors, especially retirement investors, are over-invested in bonds because they think they are safe. However, this may prove to be very wrong.
The main theme is an old one. Once QE, also known as “Quantitative Easing” is over, the 30-year bond market rally is over, finished…kaput! Well, Janet Yellen threw us a fastball right down the middle last week when she announced that the Federal Reserve would begin to sell it’s $4.5 Trillion in bonds it bought during the economic crises.
Specifically, the Fed announced plans to start throwing $6 billion a month worth of bonds in their vault at the market, that’s about $200 million a day.
This announcement was somewhat expected and probably well overdue, that’s why it wasn’t a shock. We were expecting a fastball. However, there is no getting away from the fact that the actual act of them selling bonds, and no longer just talking about it, signals the end to it’s easy money policy that bonds have relied on for the last 10 years.
Yes, the economic crises is now almost 10 years old…whoa!
The Federal Reserve feels comfortable doing this because it clearly sees an accelerating global economic recovery. Add that to record corporate profits and a 4% unemployment rate and you have a rapidly heating economy. All of this is very negative for bonds.
This is going to be a huge shock for bond investors!
Practically everybody has some bonds in their portfolio, largely because of some automated asset allocation software or some advisor that blindly recommends them because that’s what he has always done. That’s the old Buy-and-hope investment strategy, and “hope” is not a successful strategy!
Most people just do not remember the last bond bear market, but I do! Most people also do not believe that bonds can go down and lose money. They can and they do, and it can happen just as fast as stocks go down.
It’s true that if you hold a bond until maturity you will get your principal back, but who’s going to hold a 30-year treasury bond, yielding 3%, for 30 years? Nobody, of course! That’s financial suicide.
When it comes to successful investing, begin with building and maintaining a “comprehensive retirement master plan” that is customized for you and your family….not a ‘one size fits all’. Once you tell your portfolio what to do, then you can create a portfolio that is set up correctly to get the best returns, but with the least risk possible. Or what I like to say on my show “Invest For Need, Not For Greed”™. It will give you peace of mind, as it does for our clients every day.
Above all, make sure your portfolio is managed “Tactically”, never passively, which most people have. At this point in your life you simply cannot replace this money! Combine that with a forward-looking tax strategy and you’ve got yourself a plan!
Simply put, be the expert or work with a Retirement Advisor that can help you stay on track.
Feel free to contact me with any comments or questions.