Your Worst Financial Decision Ever?
by doctrader
If you currently have any bond and/or bond funds, I provide valuable information that can potentially rescue you from making; Your Worst financial decision ever! Bonds are considered to be safer investment than stocks, unless you are a General Motors Bond holder! Why you ask? Before General Motors bankruptcy, oh i mean bailout, bond holders have priority over stocks for full face value. Do you remember what happens with General Motors? I took a few minutes to refresh my memory... and guess what... i am more confused now than I was before looking into the bankruptcy... bailout....lol
The major point i want to make here is that bonds.... all bonds behave with an inverse relationship between price and yield. Ok.. ??? As bond prices rise, meaning you pay more to purchase the bond today than you would have paid for the same bond yesterday or last week, the amount of interest you receive..... yield becomes smaller.
 |
| Bond price vs. yield Seesaw by doctrader |
As the Stock market declines, institutions run to the safety of bonds, they simply want a place to hide from market volatility. The bond market operates on the law of supply and demand, just as the stock market does. When many people want bonds, prices rise. When people sell their bonds, prices fall. Guess what happens to yield and interest rates? Exactly, interest rates move higher, and higher, and higher, as more bonds begin to liquidate. If investors begin to chase yield, instead of safety, the sky is the limit to how high yields and interest rates will go and how low will the stock market fall?
Bond yields can't get any lower than zero percent, but how high can interest rate go? Remember the 70's and early 80's? The 70's started out with interest rates from 6-8%, heck even savings accounts were paying 5.25% interest! However, by the end of the 70's, the prime rate was at 18% and Bank CD's were paying 15%! Rising interest rates cause by falling bond prices will create a giant black hole siphoning off capital going into the the stock market.
The dual nature of bonds are not understood by the majority of investors, specifically the retail investor who just watches CNBC and trys to manage his own money with bad advice. Currently the 10 year treasury bond is below 2%! Once the market has stabilized, the market will begin selling bonds to either buy higher paying bonds or to roll into the stock market due to better returns.
See what is happening today with a modest stock market sell off. What will happens when Euro-debt crisis collapses with the election of a socialist and Nazi party members take control of sovereignty debt in France and Greece? The bond market is what started the last bear market sell off, and the bond market will be the cause of the next stock market crash also.
These high rates are nothing compared to inflation of food cost, and the depreciation of the dollar, but your money guaranteed to be returned at the end of the period. The guarantees apply only to holding the bonds till maturity and does not protect you from inflation risk. Look at the chart below as comparing simple compound interest rate for 30 years.
$1000 invest 30 years at interest rate
811.36 2%
1427.26 3%
2243.40 4%
3321.94 5%
4743.50 6%
You can see how fast interest rate pressure will be placed on bond yields when they begin to rise. Never underestimate the greed of Wall Street, they will always do what is best for themselves! The Bond Market is the largest financial market in the world. If you thought the stock market meltdown was rough, wait till you see the bond bombshell tear through the economy.
Unfortunately, most Baby boomers have over 50% of their wealth into bond funds!
Bond funds have outperformed most stock funds during the secular bear market starting in 2001.
Best Wishes and Good Luck
Doc
BONDS BOMBSHELLS: Your Worst Financial Decision Ever?
No comments:
Post a Comment