INVESTING WITH CLARITY™ BLOG

The Fix Is In

December 5, 2011 1:08:00 PM

The phrase he fix is in, comes from the world of gambling. This means of course, that, there is always the opportunity and danger of a fix on an outcome, or in other words, the outcome has been established in advance.

So, you may be asking yourself, what does this have to do with investing? For the purposes of investing, to me, it means a lot. It means, in my opinion, the fix is in for interest rates and U.S. bond investing.

According to Morningstar, from 2000 thru 2009, Government bonds averaged a 7.7% rate of return. Large stocks averaged a loss of (.09). In fact, if you were to go back 20 years, you would find that Government bonds have performed very well relative to stocks.

This begs the question; should we be investing in Government bonds now?

I believe U.S. Government bonds provide much higher risk to portfolios today then most investors realize.

It is important to remember that the return investors received from owning these assets over the last 10 years came from capital appreciation and interest payments. More importantly, one must remember that in a rising interest rate environment, the short-term value of bonds goes down (just as the value of a bond increases when interest rates are going down). There are of course, exceptions to the rule, however, unless you are willing to hold your bonds until maturity, you risk price depreciation and inflation risk.

Do you believe over the next 5 years interest rates are going to go up, down or stay the same?

I think they will be going up. They certainly can't go much lower! Therefore, it may make sense to consider a strategy which entails increasing exposure to international bonds and or reducing your average maturity period on U.S. Government bonds you currently own.

Bonds are a great diversification tool as they provide income and reduce portfolio volatility. However, as investors it is important to remember how you make money in bonds. Over time, it is generally by capital appreciation and interest payments.

After a more than 20 year bull market in Government bonds, I believe at this time, it is important to look closer at the potential risks associated with owning these investments relative to the potential return one may receive.

So, is The fix in? To me, absolutely! Why? Because there is no question in my mind that over time, we know the outcome.... Interest rates are going to move higher.

 


Mark Pearson

Mark Pearson

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