Best of the Week
Most Popular
1.London House Prices Bubble, Debt Slavery, Crimea 2.0 - Russia Ukraine Annexation - Nadeem_Walayat
2. Gold And Silver – 2014 Coud Be A Yawner; Be Prepared For A Surprise - Michael_Noonan
3.Sheffield, Rotherham Roma Benefits Plague, Ch5 Documentary Gypsies on Benefits & Proud - Nadeem_Walayat
4.Glaring Q.E. Failure Spotted - Money Velocity Is Falling Rapidly - Jim_Willie_CB
5.Don't Miss the Boat on Big Biotech Catalysts: Keith Markey - Keith Markey
6.Gold Prices 2014: Do What Goldman Does, Not What It Says - David Zeiler
7.Bitcoin Price Strong Appreciation to Be Followed by Declines? - Mike_McAra
8.Gold Preparing to Launch as U.S. Dollar Drops to Key Support - Jason_Hamlin
9.Doctor Doom on the Fiat Money Empire Coming Financial Crisis - Andrew_McKillop
10.The Real Purpose Of QE - It’s Not Employment - Darryl_R_Schoon
Last 72 Hrs
The Obama Game - Is Putin Being Lured Into a Trap? - 18th Apr 14
The Growing Threat to Capitalism - 18th Apr 14
Build Biotech Wealth on Solid Platforms - 18th Apr 14
Has Solar Power Finally Arrived? - 18th Apr 14
Bank Depositor Bail-Ins and Real Assets vs Liability-Based Assets - 18th Apr 14
10 Ways to Screw up Your Retirement - 17th Apr 14
One of Harry Dent’s Three Keys to Market Prediction is Cycles - 17th Apr 14
Obamacare Proof Stocks - 17th Apr 14
Gold, Silver And The Mining Sector: Prepare For A Severe Fall - 17th Apr 14
Hidden Australian Life Sciences Bio-tech Growth Stocks - 17th Apr 14
Disrupting Big Data Status Quo - 17th Apr 14
What the Stock Market Bears Have Been Waiting for... - 17th Apr 14
Copper Is Pathological and Suffers from SAD, but It Has Value - 17th Apr 14
Old World Order New World Order, Chaos And Change - 17th Apr 14
Even The US Government Will Abandon the U.S. Dollar - 17th Apr 14
Gold - Coming Super Bubble - 17th Apr 14
Glaring Q.E. Failure Spotted - Money Velocity Is Falling Rapidly - 16th Apr 14
High-Frequency Insider Trading - 16th Apr 14
Gold Prices 2014: Do What Goldman Does, Not What It Says - 16th Apr 14
These CEOs Will Make Investors Rich - 16th Apr 14
Climate Change, Central Banking And The Faustian Bargain - 16th Apr 14
Every Central Bank for Itself - 16th Apr 14
Social Security, U.S. Treasury Stealing Every Last Penny From Americans - 16th Apr 14
Ukraine Falling to Economic Warfare and Its Own Missteps - 16th Apr 14
Silver and Gold Miners Still Disappoint - 16th Apr 14
Silver, Gold, and What Could Go Wrong - 15th Apr 14
How I Intend to Survive the Meltdown of America - 15th Apr 14
France Wakes Up To The Multicultural Multi-Threat - 15th Apr 14
The Real Purpose Of QE - It’s Not Employment - 15th Apr 14
Peak Coal - 15th Apr 14
Flash Crash, Rigged Markets - What’s the Frequency Zenith? - 15th Apr 14
Forecasting U.S. GDP Growth: A Look at WSJ Economists’ Collective Crystal Ball - 15th Apr 14
Stock Market - Is Something Nasty About to Happen? - 15th Apr 14
How to Trade Your Way To Freedom - 15th Apr 14
Understanding (and Ignoring) the Media Bandwagon Against Gold - 15th Apr 14
When Stock Market Bubble Crashes, Take Refuge in Gold Stocks - 15th Apr 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

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

© 2005-2014 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

Free Report - Financial Markets 2014