Want a simple reminder that it’s almost always smarter to diversify then to chase something that’s “hot”? All you need to do is take a look at where the investing world headed in January. While it was a “foregone conclusion” that 2014 would most likely be a “bad” year to buy bonds and bond funds, they are suddenly and inexplicably the hot investment.
Fears that investors and “experts” had only a few weeks ago, that the bond bubble would collapse as interest rates started to rise. have dissipated quickly and now those same experts are going back to their investors and telling them to once again purchase bonds. While the world of bonds and bond funds is one of the slowest to move, this might be one of the fastest reversals in investment thinking ever seen.
Indeed, fund investors at the end of 2013 were somewhat disillusioned with diversification because of the fact that domestic stocks were doing so well. This sudden change is thus a great reminder that spreading your investment dollars around into several different asset classes is almost always better than trying to chase what’s hot or calculate what’s going to go “cold”.
Investors actually were thinking that interest rates would keep rising as we entered into 2014, something that was due mostly to the fact that 10 year treasury bonds were slightly north of 3% entering into January. This past week, they were down 2.7%.
Investors also figured that the Fed would buy fewer bonds (due to their pullback from quantitative easing) and that would push rates up, causing bond prices to suffer. This would of course slow the global economy and create pressure to keep rates low.
Kathy Jones, fixed-income strategist at Charles Schwab, had this to say; “When the Fed began to reduce its bond purchases, you saw a sell-off in emerging markets, declining commodity prices and a lot of the global economy had been having fun at the party because the Fed had been spiking the punch bowl, but now they were taking the punch bowl away,” Jones added that “While short-term bonds are not paying you for taking the risk and long-term bonds are still too volatile, intermediate bonds—somewhere in the three- to five-year range—are pretty attractive, especially in investment-grade corporate bonds and even municipals.”
And while Jones certainly wasn’t alone in her thinking, the question for investors is whether the “experts” were wrong then, or are they wrong now? Maybe an even better question is simply; should investors be listening? The statistics since 2008 show that most investors have over-weighted their portfolios with bonds, mostly because they were looking for protection from a volatile stock market. Of course since then the market has reversed course and it been on quite a lengthy good run, ending 2013 and what can only be described as “nosebleed levels”.
Which again just goes to show that having a well-diversified portfolio and staying the course are strategies that definitely have merit. The market, stocks, bonds and practically all investments go up and down like the tide. The investors who do the best are usually the ones that go with them, rather than try to figure out how high they’ll get.