For the past several years, investors have flocked to bonds.
Treasury bonds. Mortgage bonds. Municipal bonds. Emerging market bonds. Junk bonds. Corporate bonds. You name it, they've bought it — to the tune of $1.4 TRILLION in inflows for bond mutual funds and ETFs between 2009 and early 2013. That dwarfs the roughly $880 billion that flocked to stock funds in the four years preceding the tech bust!
Why did they allocate so much money to bonds? The economy was weak. Inflation was tame. The Federal Reserve basically claimed it could insure them from losses by buying hundreds of billions of dollars worth of bonds for its portfolio. Many were spooked by the losses they suffered in the 2007-2009 stock market crash. And Wall Street sold them on the idea that bonds were always and forever "safer" than stocks or other assets.
But that's not true. Not by a long shot! Bonds can lose every bit as much money as stocks depending on market conditions! If interest rates surge, your Treasuries can tank in value. If credit risk increases, your junk bonds can tank. If municipalities or other government entities default — think Puerto Rico or Detroit — your munis can tank. And if foreign currencies plunge against the dollar, your emerging market bonds can tank.
Right now, the biggest threat is the bursting of the bond bubble! Just like real estate in the mid-2000s and dot-bombs in the late 1990s, bonds were wildly inflated in value during the half-decade or so of the "Ultimate Bubble" in bonds. Now they're losing value month in and month out, causing massive losses for anyone who allocated too much money to bonds.
My suggestion: Re-allocate your money into other asset classes — before you lose even more! Precious metals and select stocks in non-rate-sensitive sectors of the market are good places to start. If you have to keep some of your money in bonds, at least dump your longer-term bonds. They're the most vulnerable to price declines in a rising rate environment!
Instead, stick with bonds, ETFs, or mutual funds with "average maturities" or "average durations" of two years or less. Any fund or ETF you invest in provides those figures for your review; the higher the numbers, the more money you stand to lose as interest rates rise!
Above all, remember that bond market cycles tend to last for a LLLOOONNNGGG time! And by my reckoning, we're less than a year into the bursting of the massive bond market bubble! That means we could be staring at another couple YEARS of losses or underperformance in bonds, and you have to allocate your money elsewhere to avoid the fallout.
P.S. All week long my colleagues and I have been joining readers on the Money and Markets blog to discuss current events and our forecasts for 2014 in preparation for our special year-end conference.
Knowing what you're concerned about and the opportunities you're most excited about will go a long way towards helping us make sure we cover the areas that will help you most.
Participating is easy: Just click this link to go to the blog, then scroll down and use the handy comment area to join the discussion
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