Could Bonds Currently Be Kind Of Like The Titanic?

Titanic Bonds Feb 2013

Stocks were up strong 0.73%, the S&P 500 hitting a 5 yr high close above 1530.
Bonds were down -0.05%
US Dollar was down -0.20% versus a basket of world currencies, and down -0.28% versus the Euro
Asian stocks were slightly down, but European stocks were up strong.
Gold continued its recent slide, down -0.31%, trading near 6 month lows.
Oil was up 0.83%

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The asset classes performed as I expected today.  Stocks did a little better than I expected.  And Bonds, even with their decline today, did a little better than I expected bonds would do today.

If bonds do decrease in value significantly more this year (or next year), I will probably perceive their decline as somewhat tragic.  I don’t cheer or hope for one asset class to do better than another.

If bonds lose value, the tragedy will not be that bonds lost value.  The tragedy will be that many investors (investors who rotated to bonds during the last 15 years because their retirement account “risk calculator” told them they should have a majority of their life savings allocated to bond investments) lost money while attempting to do what was “right,” what was “conservative,” what was supposed to be a safer, more risk-averse investment for their money.  If bonds lose significant value, it will be tragic for me to observe – because the warning signs and bells were signaled well ahead of their decline.

When Bill Gross (one of the heads of PIMCO – a huge bond fund company) tells people that bonds are “bubbled” in valuation and returning negative real returns (like he did in the 4th quarter of 2012 and again in the first quarter of this year), and people keep buying bonds, or stay invested in long-term bonds thereafter, then it is a little like the captain of the Titanic printing out an itinerary to all the would-be passengers, before leaving port in the Southampton, UK, an itinerary that said:

“During our voyage, we plan to scrape an iceberg several hours away from the coast of Newfoundland in the near-freezing waters of the Atlantic Ocean while traveling as fast as our engines can bear.”

I can see the passengers sitting on the dock, mulling over the decision, with luggage in hand, looking up at the massive Titanic, looking at the thousands of other passengers who intend to board, debating to each other:  “Oh my, that would be exciting – to see all of that up close, leisurely watching from the comfort of our deck chairs.  That boat sure looks big and safe.”

If bonds continue to lose value this year, it may happen like the Titanic’s sinking:  an awful, slow-developing tragedy – where everyone kind of knew it could happen, but there were so many forces going in that direction, so many people involved that it took too much to get everyone adapting, it took too long to slow down or change course.

Bonds, at this moment in investing history, may kind of be like the Titanic.  The current amount invested in existing bonds, bonds that have a historically low yield return, is immense.  It may be a long time before retirement account investors check their bond investment returns, and see the slow leak that is continuing.

It took a long time for the Titanic to sink, very slow at first, but with increasing speed thereafter.

I don’t know what’s going to happen to bonds this year or next year.  If I had to predict, I’d predict they continue to decline between now and mid April.  But I don’t know how bonds will do in the next few years.  If interest rates rise, that could really hurt bond investment returns.  That’s a big “IF.”

But I neither know enough about bonds, nor do I have enough confidence in them, to have very much invested in them currently.  Therefore, in the last 2 months, I have taken significant steps to reduce my family’s investments in bonds.

If bonds fall in value, they will not lose all value.  That is one comparative area where the “Titanic” analogy does not work.  But just like any asset class, if bonds lose value, investors will lose money – and in this case, that would be tragic.

If these issues are of concern, discuss them with your financial advisors.

It’s not the near term fluctuations in bond prices that concern me as much as the long term historical interest rates that concern me.

There may be a time, several years from now, where I will increase my investments in bonds.  But I don’t see that time being anytime soon.

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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 signigicant financial decisions should be discussed with at least a few trusted and experienced financial advisors before acting.

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