Asset Class Moves February 13, 2013

Stocks were up 0.06%
Bonds were down -0.13%
US Dollar was essentially unchanged versus a basket of world currencies, and the Euro individually.
Asian and European stocks were generally up stronger than US stocks.
Gold was down a little, near the low end of its 6 month price range.
Oil was down a little

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Commentary:

Why do bonds continue to decline in value?

For the average “educated’ investor (individual or professional), who has some money to invest, they are often asking this question:  Between the different alternate investments available, which investment might create the best return in the short and long term?

Looking at stocks, many investors appear to be asking this question:  When will the current stock bull market end?  When might it pull back some?

But with bonds, many bond investors, who know a lot more than me, are asking this question:  When will bonds stop dropping in principal value?

With stocks, the most commonly asked question appears to be: “Will stocks stop peaking in a month or in a few months?”

With bonds, the marketplace seems to be suggesting that informed bond buyers are not expecting bonds to improve in value in a month or a few months.  Bond owners are worried about this question:  Will bonds continue to lose principal value consistently over the next few years?  And if the answer to that question is “yes,” then the losses to bond investments could be ugly – a long slow bleed.

Several well-informed bond specialists are not even pretending to own or advocate long term government bonds currently.  They are flat out saying, “We own no long US or European government bonds.”  If true, that is amazing.

What are counter considerations?

I can hear a devil’s advocate asking:  Well, even if bonds lose 3% in value each year, they’re still earning a 3% dividend each year – so that would be a wash, right?  That return would be as good as just having cash, right?

Unfortunately, the answers to those questions are:  No, unless the bonds are invested in a tax-exempt account (like a Roth IRA).  If you lose 3% in principal and gain 3% in bond interest each year, you will still have to pay short term taxes on the 3% interest.  The tax hit will create a negative net return on those bond investments.

What is another counter argument?

Bonds could go up in value and interest rates could stay low.  The QE programs have already extended the bond bull market longer than most economists anticipated.  Anything could happen.

What happened to “sensible” diversified investors today?

Almost anyone who currently has an overall investment allocation of 50% in stocks and 50% in bonds actually lost money today, because the losses in bonds were twice the gains in stocks.

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Disclaimer: These posts are not written by a professional or licensed financial advisor. There’s nothing for sale here. This is just a discussion forum. No one should make any decisions based on representations made on this informal blog. These posts are just one layperson’s opinions, concerns, and observations about asset classes – a part of larger, never-ending discussions. Any significant financial decisions should be discussed with at least a few trusted and experienced financial advisors before acting.

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