The most dangerous myth out there right now is that Treasuries are the key to safe wealth building.
The balance between QE and Treasury supply will begin to shift in July. The underlying bid it has provided for stocks and Treasuries will begin to fade.
This report tells why, and what to look for in the data and the markets. GO TO THE POST
Forget about Fed Chairman Ben Benanke’s latest palliative.
This misconception will turn your nest egg into a pile of sticks faster than you can say quantitative easing.
And this is a huge problem because the baby boomers are starting to retire in droves.
I call this the Great Retirement Funding Crisis. And I am determined not to be a part of it. And I have a plan.
Over the next 15 years, over 70 million Americans – over one-third of the adult population – will reach retirement age, but most of these folks have nowhere near the amount of funds it takes to retire comfortably.
What’s even more troublesome is the fact that nearly half of those soon-to-retire have not even thought about how much it will take to finance a comfortable retirement.
And when I talk about retirement, I’m talking about financial independence.
Right now, safe investing is turned on its head and you need adapt or put at risk all you’ve have working for you.
Beyond Wealth Preservation
Over the years I have derived two simple but important axioms that guide my investing:
1. Even if you’re rich, wealth, if not replenished, will run out. If you’re not rich, growing your funds is even more important.
2. If you can get rich and know how to make wealth grow, then you can truly be financially independent.
My work at hedge funds and inside Wall Street powerhouse Goldman Sachs reinforced my view of wealth building versus wealth preservation.
And as the saying goes, I learned not to “fight the tape;” I learned to make money with the market regardless of what it threw at me.
For example, I made a very nice return from technology stock investing in the 1990s. And I continued to make money between 2000-02 even though the NASDAQ declined 70 percent. I was able to do this because I listened to the markets and I changed my strategy when the market changed.
It’s Never Too Late
The key to investing and business success is the ability to identify favorable risk-reward situations. I only invest when the upside potential outweighs the potential risks.
For instance, when investing in growth stocks, I usually limit downside risk by cutting losses quickly and letting profits run when big winners emerge.
On the other hand, when buying value stocks, getting them on the cheap mitigates some downside risk by buying them at low valuations.
The point is that there needs to be enough potential profit in the game to justify risking your capital. If the potential pay-off in an investment is low, then it makes no sense to invest in it if any downside volatility exists.
And the current poster child for this kind of investment now is the long-term U.S. Treasury bonds in the current super-low but rising interest rate environment.
Long-term Treasuries – A Bad Bet
Treasury bonds are widely perceived as a “safe” investment because of their extremely low default risk.
Although Treasuries won’t default, that’s not really the point. The value of Treasury bonds is subject to fluctuations in long-term interest rates, can be quite volatile these days. And that’s not a market you want to be in as an investor feathering a nest egg for retirement.
Because of global central bank easing, 10-Year Treasury Notes have tanked (prices have fallen and yields have risen). And it’s not because the US is breaking down. Ironically, it’s because the US economy is getting back on its feet.
And the bond selloff accelerated after June 18 when Fed Chairman Ben Bernanke talked about winding down the central bank’s $85 billion-a- month bond buying program.
In the 10 weeks since May 1, investors in the iShares Barclays Treasury Bond ETF (NYSE: TLT) lost over 12% as 10-Year Notes yield jumped from one full percentage point from 1.63% to 2.63% on July 9.
That kind of risk-reward simply doesn’t sense: you lose 12% in 10 ten weeks trying to earn less than 2% a year in yields.
Because interest rates won’t drop below zero, the capital appreciation potential is limited and the downside risk is significant; rates can easily move up to 5%, which was the level before the 2008 Financial Crisis.
Most investors in Treasury bonds were probably not expecting to take a double-digit hit in such a short time. But when too many investors seek the same safe harbor, the overcrowding and resulting overvaluation turns that safe harbor into a big target. makes the said harbor less safe. There’s a difference between the perception of risk and true risk.
I expect bonds and most other conventional fixed income investments to perform poorly in the next two years as interest rates move higher.
Income investors beware: As we enter a new rising rates environment, it’s actually more risky to aggressively chase yields than to aggressively chase growth.
Sometimes, the best defense is going on offense, and right now is one of these times.
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