SO, WHAT ABOUT BONDS?

Many investors wrongly consider Bonds to be safe. When it comes to investing, everything is relative. While individual Stocks, or categories of Stocks (i.e. Financials, Commodities, Health Care, etc.), might move opposite the overall Market, Bonds are often influenced by many of the same factors–especially Fiscal (National Budgetary) and Monetary (the FED managing interest rates) Policy. Risk can be most dangerous when it is misunderstood, or not even considered.

I have often mentioned Morningstar as, in my opinion, the best source of statistics (past performance, risk-vs-reward, portfolio composition, etc.) for mutual funds and ETFs (exchange-traded funds). The following link provides a number of pieces regarding bonds which, I believe, can be most helpful–especially as you get closer to retirement age, and start to shift more-and-more assets from Stocks to Bonds, http://news.morningstar.com/articlenet/HtmlTemplate/PrintArticle.htm?time=101234242.

In my four decades as a Financial Advisor, I believe that most FAs simply to not understand Bonds. So, how will their Clients? Over time, they shift more of a Client’s assets into them–according to some mysterious formula–but, they just find Bonds to be boring. Bonds simply don’t have the zing of picking the next Google, or watching Apple’s fall back to Earth. They would rather “swing for the fences”, than hit singles.

In a previous Blog Post, https://thetruthoncommonsense.com/2012/08/20/are-municipal-bonds-safe/SO, I had questioned whether Municipal Bonds are safe. Keep in mind that, unlike Stocks, Bond Movements, especially due to changes in Treasury or FED Policy, more or less effect the entire Bond Universe. Munis, Governments, Corporates, etc., all move somewhat together.

Movements in the Bond Market are generally more subtle than with Stocks, and not always as noticeable–at first. Also, in my time in the Financial Market, the largest short-term drop that I have seen was in Bonds–roughly 50 percent within a week or two. That was because, when FED Chairman Paul Volcker took over from President Jimmy Carter’s first FED Chief, Inflation was running rampant. Volcker raised the FED Funds Rate two full percent in one day, thus forcing a Recession to slow the Economy.

Today, more and more, people invest through mutual funds–in IRAs, 401(k)s, personal accounts, through annuities, etc. Mutual Funds are geared for the small investor. Keep in mind, however, that everyone’s money is put into the same pot. Accordingly, when interest rates rise–meaning declining bond prices–many unknowing investors are shocked–and panic. So, when the Investment Manager has to liquidate bonds (to pay those who want out)–in a Down Market–he or she are realizing losses for everyone in the Fund–including YOU!

NOTE: I might be considered a Bond Snob. When I got into the Investment Business, Glass-Steagall, the 1932 Law that separated Commercial from Investment Banking was still in effect. So, early on. my primary focus was in the Bond Markets. Banks then could only sell or trade in bonds.

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