“The bonds of matrimony are like any other bonds – they mature slowly.” – Peter De Vries
The bond market is in a huge bubble.
The Federal Reserve has been buying $120 billion a month of mortgage-backed securities and bonds.
This has caused interest rates to go down and the value of bonds to go up.
Do you remember that old saying?
It’s actually pretty important to know…
What goes up, must come down.
When inflation rises, as it is right now, eventually the Federal Reserve will have to raise interest rates.
That will cause the value of your bonds to crash.
I want to give you three reasons why you should consider selling your bonds.
1. Understanding Bonds
For our first-time readers:
My background is actually in investment advising.
I was a registered investment advisor for a number of years.
One of the challenges with being an investment advisor is that you’re encouraged to sell Wall Street financial products.
You are encouraged to sell bonds.
You’re encouraged to sell stocks.
You’re encouraged to do all that even though stocks and bonds have had multiple seasons where they’ve crashed by over 50% within 12 months.
Gosh, that sounds really risky, doesn’t it?
Well, why do we feel that stocks and bonds are safe investments?
It’s because Wall Street firms spend billions of dollars to educate people like you and me, that stocks and bonds are safe, normal, and everybody does them.
With that logic, why wouldn’t you do them?
But there is a challenge with paper assets – and a lot of different assets in general.
When someone is selling something, you can’t always trust the person that’s selling it.
They’re going to be biased.
For example: If you go to a used car lot and you’re asking what car would be a good car for you, you’re not necessarily going to get an unbiased opinion, right?
Fast Eddie is not going to really keep in mind exactly what you need.
Instead, he’s going to say that he’s got this great minivan here that you would look great in.
Or maybe a 1978 Oldsmobile.
Really, whatever he’s got on the lot to sell.
That’s what Wall Street is.
Wall Street is really out to try to sell you stuff that could be at inflated prices.
This could be stocks or bonds or any mix of financial assets that can be easily traded.
If you look deeper around Wall Street, there’s all kinds of conflicts of interest.
I actually did a video on it, which you can check out here!
At a certain point, I realized I had to leave because of the ethical dilemma that came with being in that world.
But enough about that – let’s get back to stocks and bonds!
Some say that there is a magical mix that comes with stocks and bonds.
Apparently, it all correlates with your age.
What they do is they have a formula.
They’ll take the number 100 minus your age.
For example: If you’re 50 years old, they’ll say you should have 50% in stocks and 50% in bonds.
Not everybody says this, but it is a common technique people use.
They also say if you’re seven years old, then you should be 70% in bonds.
That’s very, very heavily allocated into bonds.
The assumption here is that bonds are really safe.
They have steady payments.
So by now you might be asking:
What in the world is wrong with a bond?
Well, it’s important not to look at just the stream of payment.
It’s important to look at the value.
The value of bonds is really, really in jeopardy right now.
You can hold bonds to maturity, but let’s say you have a 5-7% bond, but inflation picks up higher.
There’s a lot of speculation on inflation, and we’re going to get into that, so keep reading!
But as for the bonds: they could be between 5-14% right now.
So if you have a fixed rate, there are some real challenges that come up with this kind of situation.
He debunks that same age-reliant formula.
In the paper, he claims that if you used the method between 1929 and 1970, you would have gone broke three times.
That’s because of the risk that is built into bonds and with stocks
You’re going to see crashes on both of those.
So it’s really important that, whatever you’re investing in, you want to understand how you could lose money.
What are the ways this could possibly go wrong?
How likely is it?
Right now, many people view bonds as sitting on a sea of thin ice that’s about to crumble.
And they might be right.
2. The Problem With Bonds
There’s actually not a problem with bonds.
Instead, it’s how bonds work.
Specifically, how they work when it comes to interest rates.
When interest rates go down, the value of bonds goes up.
It’s an inverse relationship.
In 1980, we had 15% for the 10 Year Treasury.
Now we’re at 1.2%.
So if you bought bonds at any time in the last 40 years, the bonds that you held over time were worth more because interest rates were going down.
As long as interest rates are going down, the bonds that you currently hold are worth more.
Now, if that goes the other way, you’ve got a problem.
Houston, we have a problem!
Warren Buffett has a saying: “Be fearful when others are greedy and be greedy when others are fearful.”
He’s saying you should be afraid, or you should be greedy.
But when things are really hot, it’s important as an investor that you pay attention and have some caution.
Right now, when everything’s really high with bonds, you could say:
This is great! Bonds are on fire! This is awesome!
The challenge then is to be concerned about what happens when that equation flips.
Because it’s not a matter of if…
It’s a matter of when.
It is also important to consider what could cause interest rates to rise.
So right now, the 10 Year Treasury is at 1.2%.
The lowest we’ve ever seen is 0.55%, which was last year.
The average historically is around 4.2% going back some years.
We’ve seen as high as 15% on an annualized basis.
You can easily say: Why wouldn’t the Federal Reserve just leave it the way it is, right?
If it isn’t broken, don’t fix it.
I agree, except there’s this pesky little thing called inflation.
Think about it like this:
You’re riding on your bike when all of a sudden something goes between the spokes and causes you to completely wipe out.
That’s kind of what inflation is and what it looks like.
So the question really becomes: What is inflation?
I’ve talked a lot about inflation.
The Federal Reserve says it’s only 2.4% per year.
Inflation is actually at 5.4% right now – but it’s transitory.
There may be some truth to that.
When this changes, they have to start raising interest rates.
The reason why boils down to this:
If inflation is high, interest rates are low.
This continues to really stoke these inflationary fires.
Asset prices cost more; everything costs more.
The people that really suffer are savers.
So, more explicitly, the people who hold bonds.
If I were living paycheck to paycheck and had no savings, I would be concerned.
This is because every few months, everything costs more.
Eventually interest rates will rise to try and cool inflation.
When we look back to 1980, that’s what happened.
Paul Volcker was able to raise interest rates to a ridiculous level of close to 20%.
This calmed inflation.
It’s important that we look at alternatives to this.
In this situation, you have a fixed rate return, yet inflation picks up and you’re still getting paid at a fixed rate.
I’m not just talking about hyperinflation.
I’m not just talking if things go absolutely crazy, which is a possibility.
You should make sure you have assets that have inflation protection.
So if you’re in bonds that are paying 4% and all of a sudden new bonds come out and they’re offering 8%…
Those bonds that you hold at 4% are going to be worth a lot less because these new bonds are available.
This is something to be really concerned about.
Why? Because you always want to watch out for your downside.
Something can always go wrong in any investment.
If something goes wrong, you don’t want to be blindsided and not aware of the interest rate risk.
That’s why right now I don’t like bonds much.
3. Why Inflation Protected Assets are Better
Let’s talk about inflation protected assets.
Specifically, we’re going to cover why they are so important, especially when talking about bonds and other fixed income.
Most people that are interested in bonds are drawn to fixed income.
So, knowing the amount of money you have coming in and if it’s going to cover your expenses.
Well, the challenge with that is:
If inflation picks up, you have a fixed payment coming in.
The cost of everything you need is going up.
This might not include your house payment, but food, travel, clothing, and health insurance…
All these things are going up.
So people typically are interested in fixed rates.
Most often, it’s retirees that really want that security to know their income is going to come in.
Right now bonds don’t offer that security.
Be very cautious, be very aware.
When you’re looking for yield and cash flow, don’t only think about bonds or annuities.
Anything with a fixed rate is a good choice right now for quite a number of reasons, including inflation.
Another interesting thing is called TIPS, or Treasury Inflation-Protected Securities.
This system is tied in with the CPI and states that if inflation rises, TIPS will give you a higher return.
If you want to learn more about the CPI, check out a video I did on the subject here!
But, in short, the government is incentivized to make you think inflation is lower than it really is.
Right now, inflation could be anywhere from 5-14%.
TIPS are never going to pay you exactly what that number is.
They’re going to have more incentive to have the CPI much lower than inflation.
This is a strategy you can use to take advantage of some of these low rates when you invest.
Don’t forget: I’m not giving you specific advice, but this is something that people are doing.
I think it’s really creative.
People always ask me questions like:
What do I invest in?
What do I actually have to do?
How do I get these great returns?
I’m doing fine with bonds, but what else is there?
There’s this great thing called syndication.
I discovered it a number of years ago.
Passive investors can go into larger commercial multi-family deals.
They can invest with really experienced operators and get a lot of upside and tax benefits.
There are many different types of syndicated investments.
Some of them are in real estate, some are in other sorts of assets.
I love talking about this stuff!
Our business is multi-family.
I recently talked about how you can up your retirement funds by 17x using this method.
Check out that video here!
I talk about different rates of return and things that are available today in multifamily and other sorts of real estate syndicated investments.
Mobile home parks and self-storage also offer great inflation protection.
They do very well in times of recession.
People need places to live.
If they lose their job, they might go to mobile home parks.
They may need to put stuff in self-storage.
Now you may be thinking:
Great! I’ll just take it in stocks because stocks are doing great.
Stocks are also very risky right now.
There’s so much money going in to inflate assets.
If and when the Federal Reserve does their correction, where they actually start raising interest rates, this may have a serious correction in the area of stocks.
My friend George Gammon did this video about what happens to stocks during times of high inflation or hyperinflation.
Now, I want to hear from you!
What are you doing currently?
What is it that you are finding that you’re going to put your money that both offers great returns and inflation protection?
Leave a comment down below!
I would love to hear from you!
And before you leave, make sure to check out our special report about investing. It compares the stock market to real estate, and it also includes how the pandemic affects your investment future.
If you are interested in investing with us, we are happy to answer any questions that you may have. Join our investment club today and we will be in touch.