Although bonds have become popular the past two years, our wealth managers advise investors not to put their money into long-term bonds because we believe investors could be hurt significantly if rates increase.
“It is our opinion that bond investors will be the next group of investors to get hurt,” said Dave Young, President and founder of Paragon. “In the 2000 bear market, stock investors got crushed. Then, many of those same investors moved to real estate for protection and got beaten up again in 2008. Treasury bonds performed well the entire time. As a result, since the beginning of 2009, investors have put a net $620 billion into bond funds while they have withdrawn $100 billion from stock funds. This has pushed rates to all time lows.”
Our portfolio managers claim that the current quantitative easing by the Fed may temporarily slow down increasing rates, but it won’t stop them.
“Many bonds do not have near enough return to compensate for their downside risk,” said Nathan White, Paragon’s Chief Investment Officer. “With interest rates so low, we believe that investors will not find the safety or the returns they seek in most bonds.”
Nathan said bonds have been in a 30-year bull market, which lulled investors into a false sense of security.
“Going forward, the returns that people will likely see in bonds will be very low at best or sharply negative at worst,” said Nathan. “Unfortunately for bond investors, we believe it could be the negative scenario.”
We advise investors to be aware of the maturities and quality of their bond holdings. We encourage investors to consider shortening the maturity of their bonds and adding high quality dividend stocks as an alternative.