Do the Right Thing—At the Right Time (Part 2)

In the last blog post, we explored the history of bond prices and their historical returns—and the value of your ‘safe money’ today. We now pose the questions, “How did we get here?” and “What do we do about it?”

Well, the answer to the first question is complex.  Slowing U.S. growth over the years, the 2008 credit crisis, the Fed’s low-interest-rate policy, and the aging of the Baby Boom generation are some factors. People have been scared witless by the stock market, and many investors reacted to that fear by putting their money into bonds. Recently, the Fed has been lending money at a near-zero interest rate to stimulate the economy, and the continued high demand for bonds has prevented rates from rising. All in all, the goal of obtaining a decent income from fixed income is proving more and more difficult.

And yet for the past three years, the stock market has been rising. Baby Boomers are finding that a 2% pre-inflation yield on their bonds isn’t doling out enough cash to live on. The result: are people fleeing bonds and going into stocks?

Not really. Take a look:

Fund Flows

Source: Bloomberg, Investment Company Institute

Since January 2008 and continuing into early 2013, investors have put nearly one TRILLION dollars into bond mutual funds alone, while taking OUT nearly a half-a-trillion from stocks. That strategy can work for a while … as long as interest rates continue to fall. But now, if interest rates have nowhere to go but up, what could account for the seemingly illogical continuing flood of money into bond funds that are paying basically nothing?

Look for the answer in the next post of this blog series.


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