Best of the Week
Most Popular
1.U.S. Housing Bull Market Over? House Prices Trend Forecast Current State - Nadeem_Walayat
2.The Coming U.S. Economic Collapse Will Trigger a Revolution - Harry_Dent
3. Stock Market Crash a Historical Pattern? - Wim_Grommen
4.Global Panic - U.S. Federal Government Stockpiling Ammo – Here’s What We’re Going to Do - Shah Gilani
5.AI, Robotics, and the Future of Jobs - Aaron Smith
6.This is Your Economic Recovery With and Without Drugs - James_Quinn
7.Gold and Silver Price Getting Set To Explode Higher - Austin_Galt
8.The Something for Nothing Society - Lifecycle of Bureaucracy - Ty_Andros
9.Another Interesting Stock Market Juncture - Tony_Caldaro
10.Inflation vs the Deflationary Straw Man - Gary_Tanashian
Last 5 days
Stock and Commodity Market Ratio Messages - 2nd Sep 14
Gold Price - The Thin End of the Wedge - 2nd Sep 14
U.S. Inflation Pressures in Core Food Components - 2nd Sep 14
Independent Scotland Currency, Plan A, B, C or D - British or Scottish Pound? - 2nd Sep 14
Gold and Silver Price A Critical Juncture - 2nd Sep 14
Gold and Silver Precious Metals Complex Contradiction and Potential - 2nd Sep 14
France And The Long-Gone Thatcher Moment - 2nd Sep 14
Stock Market Approaching An Important High? - 2nd Sep 14
Gold, Silver Price Summer Doldrums Coming to an End - 2nd Sep 14
The Ultimate Demise Of The Euro Union - 1st Sep 14
Palladium Price Breaks Multi-Year High Over $900 - 1st Sep 14
When Complexity Becomes Chaos - 1st Sep 14
Designer War By Default - 1st Sep 14
Islamic State or Russia? Ten Key Questions Towards Pragmatism - 1st Sep 14
Mixed Emotions for the Gold Market - 1st Sep 14
These Clowns Are Dragging Us Into War with Russia - 1st Sep 14
Marx And The Capitalist Cancer Of Overproduction - 1st Sep 14
Scottish Banks Salivating at the Prospects for an Independent Scotland of 6 Million Debt Slaves - 1st Sep 14
Small Man Europe Is Now In “Effective State Of War” With Russia - 31st Aug 14
The Unintended Blowback Of False Flags - 31st Aug 14
Tesco Supermarket Death Spiral Latest Profits Warning and Dividend Slashed - 31st Aug 14
Dow, Gold and Silver - A Last Stand, A Fake Out And A Surge - 31st Aug 14
If U.S. Consumers are so Confident Why aren't They Spending? - 31st Aug 14
Scotland Independence House Prices Crash, Deflationary Debt Death Spiral - 31st Aug 14
Obama’s “Catastrophic Defeat” in Ukraine - 30th Aug 14
Stock Market Inflection Point Approaching - 30th Aug 14
Gold And Silver - Elite's NWO Losing Traction. Expect More War - 30th Aug 14
Corporations Join Droves of Americans Renouncing US Citizenship - 30th Aug 14
Peter Schiff U.S. Housing Market, House Prices Bubble Warning - 30th Aug 14
Russia, Ukraine War - It’s Time to Play the “Gazprom Card” - 29th Aug 14
The One Tech Stock Investment You Should Never Sell - 29th Aug 14
Bitcoin Price $500 as Current Downside Barrier - 29th Aug 14
Don't Get Ruined by These 10 Popular Stock Market Investment Myths - 29th Aug 14
Low Cost Transcontinental Gold - 29th Aug 14
Gold Bullish Central Banks Should Give Money Directly To The People - Helicopter Janet? - 29th Aug 14
US House Prices Bull Market Over? Trend Forecast Video - 29th Aug 14
The Fed Meeting at Jackson Hole Exposed Yellen’s Greatest Weakness - 29th Aug 14
AAPL Apple Stock About To Get sMACked - 29th Aug 14
A History of Unlimited Money: Learn From It or Repeat Its Mistakes - 29th Aug 14
How You Can Play to Win When Market Makers Are Calling the Shots - 28th Aug 14
EU Gas Supply Is In Real And Imminent Danger - 28th Aug 14
Central Banks at the Root of Evil - 28th Aug 14
European Bond Market: Bubble of all Bubbles! - 28th Aug 14
Employers Aren’t Just Whining: The “Skills Gap” Is Real - 28th Aug 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Biggest lie in Stock Market History Revealed

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