Preparing For A Bond Bubble

The news is rife with analysis about interest rates, inflation, and the dollar, leading many to speculate that the next impending bubble to burst will be in the bond market. Looking at the flow of money over the past 18 to 24 months, it seems that investors have been loading the boat with bonds at the expense of equity. That has me nervous.

There are several things that people should be considering right now as long-term investors. Here are some suggestions:

Jettison your myopic view of fixed income. Bonds are a component of fixed income, but anallocation to fixed income does not necessarily mean that 100 percent is in bonds. Fixed income is exactly that–an asset that provides a fixed income. While it’s a little bit untraditional, look for income in unconventional places such as high-quality, dividend-paying stocks, REITs, and even some alternative structured products.

Consider selling bonds in your portfolio that you won’t hold to maturity. Most investors have an allocation to fixed income as part of their overall asset allocation strategy–and hopefully as part of a complete and comprehensive financial plan.

Buying or holding any bond in your portfolio at this point should be a complete commitment to hold it until it matures.

Otherwise, look out below.

Consider firing your active bond manager. Managers who “manage” bonds are usually appropriate when they can manage a portfolio of bonds for total return as interest rates decline (and bonds increase in value). With interest rates as low as they are, what’s left to manage (and pay for) when they start to increase? Not much.

Lose your fear of equities. A 10-year treasury bond purchased now will have an annual yield of about 1.67 percent–and will not grow your principal for the next 10 years!

There are good companies out there that have solid businesses, solid balance sheets, and great products and have dividend yields north of 3 percent.

You should consider owning equity in them.

Potentially for the next 10 years!

Tune out the 24-hour financial news cycle. Quit watching the TV and all the hype. Things may not be great right now or even for the next 6 months (or even a year). But great investors look past the short term. Turn it off. TV stations sell advertising, not advice. Don’t forget that.

If you have a complete and comprehensive financial plan, we believe there is nothing going on today that warrants your immediate attention–or the attention of your adviser.

The only thing that warrants immediate adjustment to any financial plan is an unexpected change to cash flow assumptions within the plan.

In other words, unless you have lost your job, there is nothing going on today that requires immediate action.


Unless you are a day trader.

Finally, dump the bad attitude. Unless Americans have lost their passion, inspiration, or their will to innovate, the economy will one day be back on its feet.