Bonds – Difficult Buy These Days

By: ispeculatornew
Date posted: 02.08.2012 (5:00 am) | Write a Comment  (3 Comments)

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I rarely discuss bonds here which could be seen as surprising since it is a huge market, one that every investor ends up buying in. The explosion of ETF’s has also made it much easier and affordable to invest in as well. it has even made it possible to create fully diversified retirement ETF portfolios.

As many of you know I believe in the bucket approach to investing, I’ve discussed it more in the mailing list but basically, dividend investing and a diversified ETF portfolio are my most important investments. The ETF portfolio as you would expect includes bonds.

A few weeks ago, I had money to reinvest and noticed that I was under invested in bonds. I hesitated. Should I? Shouldn’t I?

Everyone Says Bonds Have Peaked

At their most basic, bonds have two components to their returns:

-coupons
-price variations

The big problem these days is that few expect bond prices to increase. Why? Because as a general rule, the biggest influence on bond prices are interest rates. As those increase, bond prices diminish. The opposite is also true of course. So you could say that all things being equal buying bonds is a good thing when rates are likely to decline.

Now take a look at current interest rates level. Tell me, how much further can rates go? Rates are basically at 0 except for very long term rates. The odds that one or two years from now, rates will be lower or even at the same level are basically 0%. So yes, on the surface, buying bonds these days seems like a losing proposition.

Go Back 12 Months

Of course, 12 months ago, most experts said basically the same thing. Rates were near 0, the outlook was dark but still, few expected rates to remain at those levels. Forward to today and those that bought long term bonds ended up doing great. In fact, it turned out to be on of the best investments in 2011. Why? Continued economic issues, Europe, etc.

Could 2012 Be Exactly The Same?

I guess it’s more than possible that bonds, even long term bonds will continue to do well this year. Why? Depressed economy and struggling governments remain central themes and it’s very likely that interest rates will remain depressed for a very long time. Could they go even lower? Certainly it’s possible. I would say that it’s unlikely that they could go much lower so if prices of those bonds do go up, it will not be as much.

Still… I Am Buying Bonds

In the end, the whole principle behind a passive ETF long term portfolio is to stick to certain asset allocations and avoid trying to time the market. It’s difficult to accomplish, especially in times like these where it seems obvious that I should overweight or underweight certain asset classes. In the end though, I firmly believe that over long periods of time, it is much safer to stay away from such temptations. You could say I don’t live up to this blog’s name (Intelligent Speculator) but I would argue that some investment accounts should be more aggressive and others shouldn’t. I buy bonds in the long term/retirement accounts.

What about you, are you buying bonds? Do you think it’s a bad time to buy more? I’d love to get your thoughts

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3 Comments

  1. Comment by Stephen — February 8, 2012 @ 12:23 pm

    One of my IRA accounts is long term bonds, and that’s the one I’ve been contributing to lately, but I’m second guessing myself because I keep hearing this is not the time to buy bonds.

    I’m buying bonds because I don’t want my IRAs all in stocks, and also because it did really well last year. I’m still debating what percentage should be in bonds.

  2. Comment by Intelligent Speculator — February 9, 2012 @ 7:05 pm

    @Stephen – Not easy for sure, I’ll probably write about this in the near future, thanks for the idea;)

  3. […] Bonds – Difficult Buy These Days (Intelligent Speculator) […]

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