Best of the Week
Most Popular
1.The Brexit War! EU Fearing Collapse Set to Stoke Scottish Independence Proxy War - Nadeem_Walayat
2.London Terror Attack Red Herring, Real Issue is Age of Reason vs Religion - Nadeem_Walayat
3.The BrExit War, Game Theory Strategy for What UK Should Do to Win - Nadeem_Walayat
4.Goldman Sachs Backing A Copper Boom In 2017 - OilPrice_Com
5.Trump to Fire 50 US Cruise Missiles To Erase Syrian Chemical Attack Air Base, China Next? - Nadeem_Walayat
6.US Stock Market Consolidation Time - Rambus_Chartology
7.Stock Market Investors Stupid is as Stupid Goes - James_Quinn
8.Gold in Fed Interest Rate Hike Cycles- Zeal_LLC
9.The BrExit War - Britain Intelligence Super Power Covert War With the EU - Nadeem_Walayat
10.Marc Faber: Euro to Strengthen, Dollar to Weaken, Gold and Emerging Markets to Outperform - MoneyMetals
Last 7 days
Billionaire Investor Paul Tudor Jones Says Stock Market Valuation Is “Terrifying” And He Is Right - 26th Apr 17
The Great BrExit Divides - Britain, USA and France - 26th Apr 17
10 Facts That Show Our Taxes Are Worse Than You Thought - 26th Apr 17
What Trump’s Next 100 Days Will Look Like - 26th Apr 17
G20: SURPASSING THE 2nd GLOBAL STEEL CRISIS - 26th Apr 17
What A War With North Korea Would Look Like - 25th Apr 17
Pensions Are On The Way Out But Retirement Funds Are Not Working Either - 25th Apr 17
Frank Holmes : Gold Could Hit $1,500 in 2017 Amid Imbalances & Weak Supply - 25th Apr 17
3 Reasons Why “Spring Forward, Fall Back” Also Applies To Gold - 25th Apr 17
SPX may be Aiming at the Cycle Top Resistance - 25th Apr 17
Walmart Stock Extending Higher - Elliott Wave Trend Forecast - 25th Apr 17
Google Panics and KILLS YouTube to Appease Mainstream Media and Corporate Advertisers - 25th Apr 17
Gold Price Is 1% Shy of Ripping Higher - 25th Apr 17
Exchange-Traded Funds Make Decisions Easy - 25th Apr 17
Trump Is Among The Institutionally Weakest National Leaders In The World - 25th Apr 17
3 Maps That Explain the Geopolitics of Nuclear Weapons - 25th Apr 17
Risk on Stock Market French Election Euphoria - 24th Apr 17
Fear Campaign Against Americans Continues Nuclear Attack Drills in New York City - 24th Apr 17
Is the Stock Market Bounce Over? - 24th Apr 17
This Could Be One Of the Biggest Winners Of The Electric Car Boom - 24th Apr 17
Le Pen Shifts Political Landscape- The Rise of New French Gaullism  - 24th Apr 17
IMF Says Austerity Is Over - Surplus or Stimulus - 24th Apr 17
EURUSD at a Critical Point in Wave Structure - 23rd Apr 17
Stock Market Grand Super Cycle Overview While SPX Correction Continues - 23rd Apr 17
Robert Prechter Talks About Elliott Waves and His New Book - 23rd Apr 17
Le Pen, Melenchon French Election Stock, Bond and Euro Markets Crash - 22nd Apr 17
Why You Are Not An Investor - 22nd Apr 17
Gold Price Upleg Momentum Building - 22nd Apr 17
Why Now Gold and Silver Precious Metals? - 22nd Apr 17
4 Maps That Signal Central Asia Is at Risk of War - 22nd Apr 17
5 Key Steps For A Comfortable Retirement From Former Wall Street Trader - 22nd Apr 17
Can Marine Le Pen Win? French Presidential Election Forecast 2017 - 21st Apr 17
Why Stock Market Investors May Soon Be In For A Rude Awakening - 21st Apr 17
Median US Household’s Wealth Has Declined by 40% Since 2007 - 21st Apr 17
Silver, Platinum and Palladium as Investments – Research Shows Diversification Benefit - 21st Apr 17
U.S. Stock Market and Gold, Post Tomahawks and MOAB - 21st Apr 17
An In Depth Look at the Precious Metals Complex - 20th Apr 17
The Real Story of China’s Strong First-Quarter Growth - 20th Apr 17
3 Types Of Life-Changing Crisis That Make You Wish You Had Some Gold - 20th Apr 17
The Truth is a Dangerous Thing - 20th Apr 17
2 Choke Points That Threaten Oil Trade Between Persian Gulf And East Asia - 20th Apr 17

Market Oracle FREE Newsletter

Why 95% of Traders Fail

Warning: How the Bond Market Bubble Will Secretly Sabotage Your Retirement

Interest-Rates / US Bonds May 15, 2013 - 03:50 PM GMT

By: Money_Morning

Interest-Rates

David Zeiler writes: A tool intended to make retirement investing easier may result in many Americans taking an unwitting hit to their portfolios when the bond bubble finally pops.

We're talking about target-date funds, designed to be "set it and forget it"-style retirement vehicles for people who don't want to bother with actively managing a portfolio.


Such funds usually include a combination of stocks and bonds, with the ratio dependent upon the investor's retirement date.

When retirement is 25 years or more in the future, target-date funds typically hold about 90% stocks and only 10% bonds. But as time goes on, target-date funds shift the balance more in favor of bonds, with the intent of reducing exposure to risk and volatility.

By the time retirement is 15 years away, the balance is 75% stocks and 25% bonds. And when that nears to just five years away, bonds generally rise to about 40% of the portfolio.

So as we edge closer and closer to higher interest rates and the negative impact that will have on bonds - the dreaded bond bubble - many workers approaching retirement are slowly adding more and more exposure to it.

What's more, many future retirees may not even know it.

That's because employers often make target-date funds the default in their 401k plans. That's one reason that money invested in target-date funds has doubled just in the past four years to $534.83 billion.

And the true extent of the problem is actually much, much bigger, as many people follow a similar strategy in their 401ks by moving more of their portfolio away from stock mutual funds and into bond funds as they grow older.

"People think this is safe money," Dave Scott, chief investment officer of Sunrise Advisors, told The Wall Street Journal. "Losing money in bonds is a brutal way to lose money."

How the Bond Bubble Will Crush Target-Date Funds

Over the past five years, the U.S. Federal Reserve policies of keeping interest rates near zero while buying hundreds of billions of bonds have been good for bonds in general.

The low rates, which translate to low yields, have kept bond prices high. (Bond prices move in the opposite direction of yields.)

Recently, the Fed has started to drop hints that it's trying to figure out how to change its policies - cut back its bond buying and allow interest rates to start rising - without spooking the stock market and harming the economy.

The timing will depend on how well the Fed thinks the economy is doing, but most economists agree this shift is coming sooner rather than later.

In a Wall Street Journal survey of private economists taken last week, 55% said they believe the Fed will start dialing back its bond purchases before the end of this year. None expected any increases in bond purchases.

But when the Fed finally does start to reverse course, even in a subtle way, bond prices will start to fall.

Few expect the popping of the bond bubble to result in a sudden collapse in the bond market. Instead, it will be more like a balloon with a slow leak - a steady erosion over time.

That erosion will gradually eat away at the bond portions of target-date funds and take ever-bigger bites out of bond funds. Investors who own these funds potentially could lose a major chunk of their nest egg before they even realize what's happening.

"The odds of interest rates going up - just from a common-sense point of view - is very high," Bob Rice, managing partner at Tangent Capital, told The Daily Ticker. "And if that happens many of these bond funds will suffer 20%, 30%, 40% declines in value."

How to Protect Your Retirement Against the Bond Bubble

A significant investment loss just as a person is about to retire would have devastating consequences. It could force a delay in retirement, or worse - cause a retiree to run out of savings before they die.

Investors don't have many options, but Rice suggested the first line of defense is making sure you know how much exposure your retirement portfolio has to the bond bubble.

Those with target-date funds need to find out just how much of their portfolio is in bonds.

Those with bond funds need to find out if the manager has added stocks to the mix as a hedge against the bond bubble. Many bond funds can hold as much as 20% of their portfolios in stocks, but that strategy means an investor could have more exposure to equities than they think they have.

"You have to dig into the paperwork," Rice said.

Alternatives, however, are not easy to come by. Shifting to a portfolio that's 90% stocks isn't a great idea for folks approaching retirement, as it simply exposes investors to the kind of high risk and volatility they were trying to avoid by investing in bond funds.

Michael T. Prus, president of Scale Investment Group LLC, told Fiduciary News that investors anxious about how rising interest rates could hurt their portfolios "should be invested in some combination of short or ultra-short fixed-income and stable value/cash to minimize principal fluctuation to an acceptable amount."

Source :http://moneymorning.com/2013/05/14/warning-how-the-bond-bubble-will-secretly-sabotage-your-retirement/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2016 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

Catching a Falling Financial Knife