INVESTING WITH CLARITY® BLOG

Bye-Bye Bond Bull Market

March 29, 2012 8:39:00 AM

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As many of our clients and readers know, I have warned investors of the risks associated with owning bonds in todays low-interest rate environment.

After a 25+ year bull market in bonds, the party is over.

What does this mean for investors?

Unfortunately, at this point, there is not a lot of good news to report regarding the ownership of bonds.

With historically low-interest rates, inflation on the rise and the baby boomer generation moving into retirement, investors will be looking to bonds for income and continued safety in their portfolios.

Of course, one of the benefits of owning bonds, regardless of the volatility in the bond price includes the return of principle once the bond matures.

Unfortunately, many investors do not understand potential risks in owning bonds today.

For example, in a rising interest rate environment, it is very possible that the value of the bonds owned can move down in price for an extended period of time. Of course, if such an event should happen, an investor would have to decide to hold on to the bond until maturity accepting the lower interest rate or, sell the bond (more than likely for a loss) and purchase a new bond with the higher interest rate.

It is certainly not surprising that many investors have become comfortable with the idea of putting their assets into bonds. After all, with an volatile stock market and an economic crisis in the recent past, investors are very focused on safety in their investments.

Even as the stock market has move up nicely starting in October of 2011, many investors continue to favor bonds over stocks - as indicated by the money flows in February 2012. Bonds funds had positive inflows while equity funds continued to have net outflows. Frankly, I find that very bullish for equity investors.

Regardless of your investment objectives, you must understand how the bond market and bonds work. With an increasing desire by investors to be safer with their investments and the higher probably of interest rates moving up or staying flat, investors could face some significant challenges in owning bonds and accomplishing their investment goals.

With more than 25 years of a bond bull market and historically low-interest rates, investors must make sure they understand their portfolio allocation and the associated risks in owning bonds today.

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In light of the economic crisis in 2008-2009, many investors have continued to invest their assets in bonds and bond mutual funds over equities and equities mutual funds.

 

Unfortunately, once again in February 2012, bond mutual funds had net inflows, while equity mutual funds had net outflows.

As the the cartoon above aptly states, should've, would've, could've, welcome to the investment hindsight show\, it is my hope that investors understand the potential risks in their bond portfolio in a rising interest rate environment.


Mark Pearson

Mark Pearson

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