Bubbles and Bonds
This is part of a recurring column from Merrill Lynch wealth management advisors David Menashe and Bruce Morley, who have both worked in Rancho Santa Fe, CA for more than 28 years.
Economic bubbles can be deceptive, occurring over a long enough period to be perceived as normal. Baby boomers had their first taste of a bubble during the 1970s when gold soared from $42 to over $900 over the course of a decade. After that, investors swore they would never again get caught in such frivolous investments.
That was until the Internet bubble, where fortunes were made not in years but weeks. After the Internet collapse, investors were determined to only invest in tangible goods such as real estate.
Then the real estate and stock market collapse highlighted a new bright spot: investments offering safety, such as bonds.
Bond funds have collected $209 billion of inflows through August 2012, up 18 percent from the same time last year. This rush has been more impressive for high-yield bonds, with the annualized pace running at almost three times the past record flow in 2009.
However, this piling into bonds poses a serious risk when too many investors decide to suddenly exit simultaneously. Do not let the idea that bonds are safe lull you into complacency. Not all bonds are the same. Talk to your advisor now about the risks bonds may pose and whether any adjustments should be made to your portfolio.
Investing involves risk, including the possible loss of principal.
Past performance does not guarantee future results.
Bond funds have the same interest rate, inflation, and credit risks that are associated with the underlying bonds owned by the fund. Generally, the value of bond funds rises when prevailing interest rates fall and falls when interest rates rise. There are ongoing fees and expenses associated with owning shares of bond funds. (858.381.8113)
David Menashe is a senior vice president, and Bruce Morley is a vice president and wealth management advisor for Merrill Lynch, Pierce, Fenner & Smith Incorporated, a registered broker-dealer, member SIPC, and a wholly owned subsidiary of Bank of America Corporation. Investment products are not FDIC-insured, are not bank guaranteed, and may lose value.
Photo by Andy Templeton