Friday, September 17, 2010

Why Are You Buying A Stinkin' Bond Fund Now?

¹²Why Are You Buying A Stinkin' Bond Fund Now?
Click here for a link to ORIGINAL article:

By Dr. Steve Sjuggerud | 25 August 2010

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 rise 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 because you'd get your $10,000 back. [[Less the 'Cost Of Living' inflation penalty.: normxxx]] 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. [[That's not a typo; yes we're up over 1,350,000% (and climbing) since then— a hair under the GDP for 2009!: normxxx]]

Today, with interest rates of 2.5%, investors are flocking to bond funds. Meanwhile, the national debt will hit $15 trillion and [surpass] 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? Now is not a time to be a wimpy investor...

Now is not a time to hide in bonds, which is what everyone else is doing. You earn next to no interest— and yet your principal could get clobbered, particularly in those supposedly safe bond funds.

Things are getting less bad— and that is incredibly exciting as an investor. You make the most money in stocks (and most other investments) when 'things are getting less bad'. Once things are "normal" again, you've missed it completely. Once things feel "great"— as they did in the real estate boom— look out! Things can only get less greatand that's when you lose real money.

Good investing,
[ Normxxx Here:  But do stay loose until we have clearly "bottomed" for this year and have entered into the "Presidential rally"— possibly another month or two.  ]

Steve M O R E. . .

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