The bond market has been a topic of conversation in recent times in that it is slated to crash. In fact, master investors have been advising other investors to not own bonds and, if they do own them, it may be wise for them to move away from them. Investors are being advised to sell and move out now. The reason is because the bonds are slated to lose 25% when the fed raises the rate. As of now, the rates are staying down because the 10-year Treasury bond yield is 2%. When the yields are increased to their average of 5.5%, an intermediate bond fund could lose 25% of its value.
The Fed has said that an increase is imminent, so this has caused the warnings to become quite loud. These warnings state that bonds are going to crash. Investors still hanging on to their bonds will get hit hard and those who have placed their retirement money into bonds could suffer greatly.
What to Buy
Professional advisers are recommending that investors should buy index funds rather than individual stocks. Instead, the word is to invest in low-cost index funds rather than delving into stock-picking.
So why not get engaged in a little stock picking? The answer is simple: There is a large number of investment advisers helping with these picks who may not know much more than you do. Most active managers are underperforming because of their fees. As a matter of fact, only 20 % of investment advisers are seeing gains for their clients. This means that they are seeing returns above the market after the fees.
This is not saying that all advisers are bad. You simply have to ask a lot of questions when choosing one because you do not want to find yourself losing valuable savings or retirement money. You need to ask questions regarding fees, returns, performance records, and suggested investments. Before making a commitment, you can compare the information you receive to what is happening within the market.
10 Rules to Follow
In order to win in the game of investing, you have to know what to do in regards to the upcoming bond crash. This means creating a winning investment strategy so you know where to go once you cash out the bonds. The rules are:
1. Avoid bonds speculation
One adviser may say be careful while another says to take a gamble toward significant returns. A lot of this is based on speculation. Speculation is not healthy. Instead, investment must be based on fact rather than what might happen.
2. Save more
Save more money on a regular basis. America’s savings rate is down from where it was twenty years ago. It climbed during the recession, but it is now back on the decline since the economy is recovering. Saving can help you in the future because, as it stands, there are many retirees with very little money to sit on because they did not make previsions in the past or bad investments led to their financial demise.
3. Leave home equity alone
Your home is the roof over your head. While home equity may be climbing with the recovering housing market, you do not want to use your equity to invest. You don’t want to use it for other property investments because the housing bubble could pop again at any time. You also don’t want to use it to buy what you want. There may be a time when you really need it for living expenses. If you leave it alone, more of it will be there to help you.
4. Brokers are out for themselves
Brokers can help you, but they can also hurt you. While you may have a fantastic broker, that person is still making their living on the fees that you pay and the commissions that reduce the dollar amount of you returns. This is another reason why you should turn your thinking toward index funds.
5. Avoid commodities
As tempting as it may be to add a small allocation of metals, energy, or other commodities to your portfolio, it can be risky. Those who start commodity trading tend to lose money as amateurs. In fact, they tend to lose all of their capital within the first 18 months of trading and then they quit, especially when trying to trade commodities in the short-term.
6. Avoid the latest trading fads
If an exciting deal comes your way, try to resist. The irrational trading and exotic opportunities are exactly what led to the trouble that occurred in the 1990s when dot-coms were becoming hot. It occurred again from 2005 to 2008 with real estate.
7. Taxes are secondary
You shouldn’t invest for the tax benefits. The tax benefits should be secondary because investing for a tax break could result in a bad investment.
8. Stick to your goals
Write down your goals and make sure you stay with them. If you want to use a long-term, well-diversified allocation strategy, you have to have a plan. You have to have a budget, a savings plan that includes regular contributions to a retirement plan, and goals for your career. Begin with living below your means so that you can save more rather than later when it’s too late. Putting it in writing will help you stay on track.
9. Avoid your emotions
It is very easy to allow your emotions to get in the way of your investing. Behavioral economics have become a major part of investing, showing how investors can easily become their own worst enemies. This is because emotions trigger mistakes. Your mind may be telling you what the rational thing is to do, but your emotions may be telling you that it is too much money or too much risk. Time and time again it has been proven that the mind wins before the emotions.
10. The bond roller coaster
Like stocks, bonds can go up and down, taking you on quite the roller coaster ride. You will do well with bond investing if you keep in mind that you increase your odds of winning if you cash out before the Fed increases rates, which causes bond values to fall.
By selling bonds now, following the above rules, and placing the money in investments that will grow, you will be able to prosper. At the same time, make sure you save money so that you always have a cushion of money to fall back on. While the economy may be in recovery mode and the stock market is performing better than it has in years, you never know when a crash will occur. The last one was sudden, which means the next one may be sudden as well. If you do not get out of your bonds on time, then you can cash out as soon as possible and follow the rules toward much healthier investments that will be more prosperous in the long-term.