In fact, the whole idea of bonds and fixed income as 'safe investments' which will return income and protect the principal on an inflation adjusted basis is a wrong one today and will be for the foreseeable future as well.
That's been my expressed firm view for some time now, of course, but don't just take my word for it. Let's listen to what a real expert has to say.
10 investing rules for the coming bond crash is subtitled 'Warning: Your bond funds could lose 25%:
"“The best piece of advice I could give long-term investors today is don’t own bonds. And if you do own them, you probably ought to move out of them,” warns Charles Ellis, acclaimed author of the classic “Winning the Loser’s Game: Timeless Strategies for Successful Investing.”
Get it? Do not own bonds. Sell. Move out now. . . .
Here are the numbers: “Right now the Federal Reserve is set on keeping rates down,” explains Ellis, because “the yield on a 10-year Treasury bond is under 2%. When yields go back to their historical average of 5.5%, an intermediate bond fund could go down 25% in value.”. . .
Investors will get hit hard: Ellis says “people who are putting their retirement money into [so-called] safe-bonds can get hurt badly,” . . . when the bond bomb goes off.”
Forget individual stocks, buy index funds
. . . “So they should be buying stocks?” Ellis was emphatic: Not stocks. “They should absolutely invest in a low-cost index fund ... forget about stock-picking.”
Why no individual stocks? Very simple: The fact is that most investment advisers are losers. Or as Ellis more delicately puts it: “Most active managers underperform because of the fees.” In fact, 80% of all investment advisers lose money for their clients because “after fees, their returns end up being below the market.”
Yes, they are losers. They are losing their investors’ hard-earned retirement money. Solution: Investors should switch to index funds to save 30%. But year after year they remain in denial and just keep throwing away their hard-earned retirement money. . . .
10 rules: Winning the loser’s game is no sell-bonds one-trick-pony
Main Street’s long-term investors need to look (at the book written by Ellis) “Winning the Loser’s Game: Timeless Strategies for Successful Investing,” which is coming out with a sixth edition soon. Ellis originally wrote it in the mid-1970s.
The legendary management guru Peter Drucker calls it “the best book on investment policy and management.” And Jack Bogle credits Ellis’s book as the inspiration for his first index fund at Vanguard in 1976. . . .
Ellis says the winning strategy for Main Street investors playing in Wall Street’s casino against killer pros is being patient, minimizing mistakes. Yes, follow his 10 rules and you can win the “loser’s game:”
1. Never speculate
Yes, the financial press acts like Nascar cheerleaders. One says jump on board now, this market is a “muscle car mired in the mud,” soon to get “unstuck.” Another tells investors to gamble: “For higher returns, you need to get into riskier investments.” No wonder Ellis coined the term, “Loser’s Game,” it’s accurate.
2. Your home is not a stock
You live in it. Today many mistakenly assume that rising equity values mean you don’t have to save for retirement. Or that you can use a home-equity loan to buy stuff. Or worse yet, use that money to buy more properties and start condo-flipping. Warning, when the bubble pops it will be too late for you to exit the loser’s game.
3. Save lots more regularly
“Savings glut” is the latest euphemism invented by happy-face economists and politicians. America’s savings rate has dropped from 10% two decades ago to zero, and has only recently started back up. Out-of-control consumption means importing and running trade deficits,. Meanwhile China recycles our dollars into Treasurys. This game is ending. Not saving now won’t help you later. Most retirees have too little set aside.
4. Brokers aren’t your friends
There is an inherent conflict of interest between you and every broker in the world. Even if they’re your neighbor and best friend. Bottom line: They make their living on fees and commissions, and that reduces your returns. They win and you lose. Think index funds.
5. Never trade commodities
Yes, you may want to add a small allocation of energy, metals or other commodity index funds to your long-term portfolio. But short-term trading is a loser’s game, and a fast one. . . .
6. Avoid new and exciting deals
Right now, with all the turmoil and risks domestically and globally, chasing hot stocks and exotic opportunities is an instant replay of the irrational exuberance that got us all in trouble with dot-coms in the 1990s, real estate around 2005-2008.
7. Bonds also ride up and down
. . . you increase your chances of winning the loser’s game remembering that as soon as the Fed increases rates, bond values will crash.
8. Never invest for tax benefits . . . .9. Write your goals ... and stick to them . . . .
10. Never trust your emotions
Behavioral economics was launched when Ellis wrote the first edition of “Winning the Losers’ Game.” This new science makes it clear investors are their own worst enemy. We’re not rational. We’re too optimistic in spite of impossible odds.
The pros own the game, insiders own the casino, rig the tables. They have more information, get it faster than you do, got more chips to play with, and they spend all day playing ... while you work for a living. You’re an amateur, at the loser’s tables, playing by their rules."
Most of the so-called investing pros are traders in disguise looking to generate fees and commissions for themselves. They do that by selling their services and taking money from amateurs like us.
Accordingly, we amateurs need to be informed savers and investors. Along those lines, we should know enough to recognize 'what's up' and be proud of the fact that we're self interested amateurs and not self interested pros. We do that by not buying what the 'pros' are selling.
If we take the time to learn the simple basics of saving and investing, we can save paying the fees and commissions, ignore the short term volatility of the market movements and look to the benefits of long term ownership in the shares of quality companies.
And since it doesn't take much ongoing effort or 'time-on-task,' we can do so and still have lots of time to spare.
In other words, staying tuned and staying informed doesn't mean staying glued to the short term ups-and-downs of the market.
So here's the deal for DIY individual investors who don't want to spend a lot of time and money on planning, saving and investing for the long run.
Save a substantial percentage of your earnings regularly, invest those savings continuously, buy an S&P 500 index fund or similar passive investment, and enjoy the LONG TERM ride to a comfortable retirement income based on the rule of 72 DIY stock ownership investing.
That's my take.