Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Palladium Surges above $2,400. Is It Sustainable? - 27th Jan 20
THIS ONE THING Will Tell Us When the Bubble Economy Is Bursting… - 27th Jan 20
Stock Market, Gold Black Swan Event Begins - 27th Jan 20
This Will Signal A Massive Gold Stocks Rally - 27th Jan 20
US Presidential Cycle Stock Market Trend Forecast 2020 - 27th Jan 20
Stock Market Correction Review - 26th Jan 20
The Wuhan Wipeout – Could It Happen? - 26th Jan 20
JOHNSON & JOHNSON (JNJ) Big Pharama AI Mega-trend Investing 2020 - 25th Jan 20
Experts See Opportunity in Ratios of Gold to Silver and Platinum - 25th Jan 20
Gold/Silver Ratio, SPX, Yield Curve and a Story to Tell - 25th Jan 20
Germany Starts War on Gold  - 25th Jan 20
Gold Mining Stocks Valuations - 25th Jan 20
Three Upside and One Downside Risk for Gold - 25th Jan 20
A Lesson About Gold – How Bullish Can It Be? - 24th Jan 20
Stock Market January 2018 Repeats in 2020 – Yikes! - 24th Jan 20
Gold Report from the Two Besieged Cities - 24th Jan 20
Stock Market Elliott Waves Trend Forecast 2020 - Video - 24th Jan 20
AMD Multi-cores vs INTEL Turbo Cores - Best Gaming CPUs 2020 - 3900x, 3950x, 9900K, or 9900KS - 24th Jan 20
Choosing the Best Garage Floor Containment Mats - 23rd Jan 20
Understanding the Benefits of Cannabis Tea - 23rd Jan 20
The Next Catalyst for Gold - 23rd Jan 20
5 Cyber-security considerations for 2020 - 23rd Jan 20
Car insurance: what the latest modifications could mean for your premiums - 23rd Jan 20
Junior Gold Mining Stocks Setting Up For Another Rally - 22nd Jan 20
Debt the Only 'Bubble' That Counts, Buy Gold and Silver! - 22nd Jan 20
AMAZON (AMZN) - Primary AI Tech Stock Investing 2020 and Beyond - Video - 21st Jan 20
What Do Fresh U.S. Economic Reports Imply for Gold? - 21st Jan 20
Corporate Earnings Setup Rally To Stock Market Peak - 21st Jan 20
Gold Price Trend Forecast 2020 - Part1 - 21st Jan 20
How to Write a Good Finance College Essay  - 21st Jan 20
Risks to Global Economy is Balanced: Stock Market upside limited short term - 20th Jan 20
How Digital Technology is Changing the Sports Betting Industry - 20th Jan 20
Is CEOs Reputation Management Essential? All You Must Know - 20th Jan 20
APPLE (AAPL) AI Tech Stocks Investing 2020 - 20th Jan 20
FOMO or FOPA or Au? - 20th Jan 20
Stock Market SP500 Kitchin Cycle Review - 20th Jan 20
Why Intel i7-4790k Devils Canyon CPU is STILL GOOD in 2020! - 20th Jan 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Why Are You Buying a Stinkin' Bond Fund Now?

Interest-Rates / US Bonds Aug 25, 2010 - 08:15 AM GMT

By: DailyWealth

Interest-Rates

Dr. Steve Sjuggerud writes: You're guilty... You're busted.

But it's not just you... Everybody is doing it. Everybody is buying bond funds.


As I'll show you, this is incredibly foolish.

First off, I know what you've done... I know 98% of the money that's flowed into the Franklin Templeton funds this year has gone into bond funds. The trend goes back farther...

For the last 30 months in a row, inflows into bond mutual funds have topped inflows into stock mutual funds. And the totals are just ridiculous... $559 billion has flowed INTO bond mutual funds in the last 30 months, compared to a $233 billion OUTFLOW from stock funds.

So you've sold your stocks and you've bought bond funds. But why?

Look, as I write, 10-year government bonds pay 2.48% interest. Meanwhile, the average bond fund charges 0.61% in annual fees. Think about that...

Right off the top, you're giving up 25% of the interest you'll earn to the bond fund manager. Why would you do that? Next, think about this: The BEST you can earn in interest in that bond fund is less than 2%. But the WORST case is really bad...

If interest rates happen to rise from 2.5% to 3.5% over the next 12 months, your principal (the amount you invested) will crash in value. A $10,000 investment would fall to $9,200. If interest rates rose to 5%, your principal value would crash to $8,200. Those numbers don't include any fees... That's just basic bond math.

If you held an individual bond, you could hold until maturity, and you'd be OK... you'd get your $10,000 back. But not in a bond fund... The bond fund manager may well sell losers at a loss, year after year. If interest rates go up year after year, bond fund losses will keep increasing year after year.

Do you really want to lend money to the government and earn less than 2% interest? Do you really want to have the risk of your principal (your initial investment) getting eaten away from both fees and potentially higher interest rates?

The miniscule interest is not worth the horrible risks.

Consider the early 1980s versus today: In the 1980s, when interest rates were in the high teens, nobody wanted government bonds. They were considered "certificates of confiscation." Investors were fearful. They weren't willing to accept 15% interest rates from the government, because the national debt was fast approaching $1 billion, which was one-third of GDP.

Today, with interest rates of 2.5%, investors are flocking to bond funds. Meanwhile, the national debt will hit $15 trillion and reach 100% of GDP next year.

Go figure.

Investors are scared of stocks... They haven't made any money in stocks in over a decade. Meanwhile, stocks are the cheapest they've been since the late 1980s.

You want to buy what's cheap and sell what's dear. That's how you make money investing.

Stocks are cheap. Meanwhile, bonds are dear. So what are you doing buying bond funds?

Good investing,

Steve

Editor's note: If you're looking for low-risk ways to increase your income in retirement, Steve has put together a full report on how to up your Social Security payout by as much as $1,068 per month – and how to take advantage of several other little-known Social Security "loopholes." To learn more, click here for a video presentation.

http://www.dailywealth.com

The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.

Customer Service: 1-888-261-2693 – Copyright 2010 Stansberry & Associates Investment Research. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This e-letter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), in whole or in part, is strictly prohibited without the express written permission of Stansberry & Associates Investment Research, LLC. 1217 Saint Paul Street, Baltimore MD 21202

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Daily Wealth Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules