I should be accustomed to it by now—the contradictory
financial advice we get from newspapers, television, radio talk shows, books,
and the buddy at work. It’s not all bad advice, necessarily. In fact, it might all be right (sometimes),
but only for certain people.
This week I read an article lamenting the fact that people
are taking so much money out of stocks and putting it into bonds. Stocks, in fact, had a net outflow of money
while bonds had a significant influx of investment dollars over the last
calendar quarter. The authors pointed
out that people investing in, or transferring their money into, bonds were
losing out on the money to be made in the current, record-breaking rise in the
stock market.
Well, yeah, that’s probably true. But on the other hand, isn’t that exactly
what financial experts have preached at us to do? When stocks are flying high, it probably means
two things: investors’ have accumulated a lot of money in their accounts, and
their portfolios are out of balance, with too much money in equities (stocks)
because of the outsized growth in their value.
So what should these people do? This
is exactly the scenario in which they should harvest some of those stock gains
and put it in safer investments to protect against the next downturn. It’s called selling high, and it’s a good
sight better than selling an investment when it’s low and you don’t make as
much on it.
What the authors of that article are forgetting is that no
one can reliably predict when the market has reached its peak and stocks are at
what will be their highest price before beginning to fall. That would theoretically be the best time to
sell and make the most off your investment.
But that is called market timing, and it’s impossible to master. I suspect that many people—the ones putting
their money into bonds now—are betting that the stock market is going to start
falling soon, so instead of waiting for the mad rush to sell later as prices
drop precipitously, they are moving out of the high-priced stocks and buying
low-priced bonds. It’s smart investing
and in this case the opposite of greed.
Bonds generally have a reputation as a safe,
revenue-generating investment during retirement years. That, in fact, might be another reason for
the rush to bonds: more people are retiring.
What’s the figure I heard quoted: 10,000 Baby Boomers retire every
day? If they are investing in bonds to
reduce their risk of losing a ton of money just as they are entering retirement,
aren’t they just being wise? After all,
a severe market downturn in the first few years of one’s retirement can, if not
planned against, increase the odds of running out of money late in life.
That is exactly the strategy I’m following. I’ve gradually been moving more money into
short-term bonds. They make me only very
modest gains in value, but they also give me diversity in my investments and a
small measure of financial protection.
(I keep remembering that even bond funds took a big hit during the last
recession.) And it’s a strategy that I’d
bet a lot of others who are not at retirement’s door are following. They are rebalancing their portfolios so they
are not too heavily into one market segment but have a balanced diversity. Financial gurus have been telling them for
years to at least annually rebalance their portfolios, especially in a rising
market like this one. Now they are doing
it. They’ve been listening. Maybe they learned something from the recession,
which was largely caused by stupidity and greed. That would be an encouraging sign for the
future. Now if only the financial
talking heads will leave them alone.
Until next time,
Roger
“Invest in seven
ventures, yes, in eight; you do not know what disaster may come upon the land.”
Ecclesiastes 11:2 NIV®*
*Scripture quotations taken from the Holy Bible, New
International Version® NIV®
Copyright © 1973, 1978, 1984, 2011 by Biblica, Inc.™Used by permission. All rights reserved worldwide.
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