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Do You Own Bonds?
By Thomas Mullooly
The better question might be: Why do you own bonds today?
Lately we’ve seen more damage done to bond accounts than any time in the past few years. I’m warning friends and foes alike, if they own bonds in their accounts here in the spring of 2006, be prepared to see some serious deterioration in their monthly statements.
So, what’s a girl to do? Well, in our practice, we’ve been avoiding bonds for two years now. That was when bonds gave a relative strength sell signal. We moved a great deal of money that WAS in bonds into laddered Certificates of Deposit (CD’s). We knew from our experience that when bonds gave a relative strength sell signal versus the overall market, bonds in general would not do well.
And bonds would likely be a lousy place to have money invested.
Keep in mind that relative strength means “how is your investment performing compared to the rest of the market?” When an investment gives a relative strength buy signal, it is typically rising faster than the overall market.
But when an investment gives a relative strength SELL signal, this usually means this group can fall farther...and faster...than the market overall. Bonds gave a relative strength sell signal two years ago.
Now, let’s get clear on something! A relative strength sell signal implies market UNDER performance. That doesn’t mean the investment will lose money! It doesn’t even mean the investment will go down in value. Relative strength sell signals mean the investment will not perform as well as the rest of the stock market.
So what has been happening these last few weeks with bonds just confirms what the relative strength charts have been telling us for two years. That message has been: do your very best to avoid investments where there are relative strength sell signals. Your performance could improve significantly by just taking a pro-active step like that!
Now here is why so many will lose money
I keep harping on this because there are literally hundreds of thousands of investors in programs like 401k plans with money in bonds. Every week, these folks mindlessly invest a portion of their paycheck into some asset allocation model, geared for the day they retire.
In fact, those investors ages 50 and over that have money in “Lifestyle Funds” in their retirement plan may really be in for a surprise. You know these funds…available today in so many retirement plans…all you need to do is pick the fund that is closest to your approximate retirement date, and the fund manages the asset allocation itself! Sort of a “set it and forget it” plan.
Well, they got the “forget it” part right! See, as you get closer to retirement, these plans automatically move more and more of your money into bonds. It’s done automatically, based on your age and how close you are to retirement. Folks as young as 50 years of age are seeing more than 50% of their money moved into bonds. They could truly get crushed if rates continue to rise. Because as interest rates rise, bonds usually drop in value.
And like they say on late-night TV “but wait, there’s more!” If you have money set aside in a 529 plan, so Junior can attend college in the future, watch what happens to the asset allocation as Junior starts approaching college age. These funds often downshift…”for safety and less volatility” into bonds.
Oh! Don’t forget that there are many, many, MANY investors who use a computerized asset allocation program to “balance” the rest of their investments. They place a portion into stocks, a portion into bonds and bond funds and some into cash. When the markets are unstable, many investment firms will recommend clients shift a portion out of stocks and…into…you guessed it…bonds!
So while you may not own any individual bonds, you (or someone you love) may have a TON of money invested in bonds. Or they may have money invested in stocks that are sensitive to changes in interest rates.
About the Author :
Thomas Mullooly, President of Mullooly Asset Management, works one on one with individuals so they can regain control of their investments. Tom's popular email alerts help folks to reduce the risks in their portfolios. To learn how to stop making simple investing mistakes and to sign up for Tom's email alerts, visit http://www.mullooly.net, today.
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