A couple of words about bonds here… and a little bit of a warning as the media-hype machine touts the past success of bonds.
(Hint: Although the monkey thought it was all in good sport, we all know what happened to the weasel next.)
My long-running pseudo-battle with Bill Gross and the Bond Sellers came to an end this fall when we exited our long-term Treasury positions. I still do not like long-term bonds as an investment vehicle right now. The simple reason is that the price is too high.
The price of the long bond (20+ year Treasury) ETF (TLT) is being held up at weirdly astronomical levels by investors who can’t think of any safer place to put their money. The troubles in Europe have driven investors around the globe out of the Euro and European country’s sovereign debt and into the dollar and US debt.
Remember this: People are not buying US debt because it’s “all that”… it’s not, and it’s providing a lousy rate of return… but, hey… we can print our own money and the Europeans can’t, so Treasuries seem to make a pretty decent “mattress” for global investors to stuff their cash into at the moment.
I have my ears to the track and I’m hearing that money has been coming out of stock mutual funds at another record pace here recently. And where is that money going?
U.S. stock mutual funds that invest in domestic equities had their second-biggest redemptions last year as record market swings sent investors to the perceived safety of bond funds.
And why do we suppose it’s going in to bond funds?
Despite a reputation for being a slow-growing alternative to stocks for the risk-averse, bonds just passed stocks’ long-term performance over the past 30 years.
Many investors chase last year’s winners, perennially dooming them to under-performance… not to mention it makes you feel like you’re always in the wrong place at the wrong time… very hard on the ego. It’s kind of like charging into real estate in 2006: It seemed like a good idea at the time.
In fact, you are actually witnessing an historical event: A bond bubble that offers the most expensive bond market in your lifetime. Don’t bite… The minute Europe straightens out their situation, the bond market bubble will pop.
Here is a very wise investment technique (good for all fields at all times): Take the time to figure out precisely what everybody else is doing… and then do the opposite.
ACTION ITEM: If you have bond investments, reduce or eliminate your allocation to them.