Anytime anyone consults a financial adviser, two things typically occur:
- The financial adviser tends to recommend their “in-house” products, which often come with high management expense fees ranging from 2-3%
- They inquire about your age and then miraculously present a fund tailored to individuals in your age group.
We’ve discussed point #1 in previous posts. Financial advisers invariably promote funds with high expense fees because they receive kickbacks known as trailer fees, which constitute a significant portion of their income. However, it’s important to note that these trailer fees come out of your pocket. It is in the financial adviser’s best interest to consistently suggest products that offer the most generous commissions.
Despite the fact that there are numerous low-cost index funds and ETFs that might be the best options for their clients, financial advisers seldom recommend them because they do not involve commissions. The success of investment advisers often depends on their clients’ lack of knowledge.
As for point #2, they are equally inadequate. The typical formula for selecting a stock and bond portfolio is to subtract your age from 100%. This implies that if you are 30 years old, your portfolio should consist of 70% stocks and 30% bonds. If you are 50 years old, the recommended allocation is 50% stocks and 50% bonds, and so on. Is age really the most significant factor? What if I am already a millionaire? What if I am struggling to pay my rent? What if I am in good health? What if I am in poor health? These factors seem to be overlooked as financial advisers simply refer to tables provided by their employers and assign clients to predetermined brackets from their sales manuals.
Historically, stocks have consistently outperformed bonds as an investment, but investing in bonds can create a false sense of security. In reality, bonds offer reduced volatility, but less volatility does not equate to lower risk. Over the long term, bonds are not less risky than stocks; they are simply less volatile.
The truth is that the more bonds you hold in your portfolio, the more you limit your growth potential. Why would anyone sacrifice their potential for earnings simply because they are older? When you are older and in need of your money the most, that’s precisely when you would want your money to work its hardest for you.
Here’s another aspect that concerns me. While it is commonly said that no one can predict the market and diversifying between stocks and bonds is prudent, there comes a point when you should set aside these rules of thumb and rely on common sense.
Conclusion
- Seek out a fee-only financial adviser. Avoid financial advisers who earn their living through commissions, as they tend to promote products that offer them the highest commissions.
- Consider excluding bonds from your portfolio, especially now, but ideally, never include them. Why settle for lower returns? Even in retirement, you likely want your money to continue growing.
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Comments
6 responses to “Now (and always) is the worse time to invest in bonds”
You are reaching the same erroneous conclusion other investors have already made and ignoring the fact that interest rates can be negative and have gone negative in other parts of the world. See Japan, Denmark, and Sweden. This means that bond prices can go far higher than you expect.
You are also ignoring the fact that North American equities are at all time highs and the VIX is at a mere 12. Seeing as government bond prices are negatively correlated with equity prices, now would be a perfect time to rotate into government bond ETFs if you believe another crisis is imminent.
When you think of short term (1-3 year), yes, it is very possible that interest rates can go from almost zero, to zero to negative ( how much into negative?). Is it sustainable? Can any of those countries sustain negative interest rates for a long time? We don’t know, we have never been in this position before, but if I was a gambling men, I will bet that eventually interest rates will be positive and probably higher. The beauty of writing our thoughts is that we can go back a year from now and confirm on whether we made the right assumptions or not.
This is a link of a 10 year graph with including the S&P, and Vanguard Long term, medium term, and short term bond. Yes, some times there is an inverse correlation, some times there a positive correlation and some times there is no correlation at all.
1. People should not be all in North American equities
2. If North American equity goes down, it does not mean that bonds will go up. For bonds to go up, interest rates have to go down even further.
3. There is no much room before bonds go to zero. How much could they go into negative territory? People in those countries you mentioned, are opting to keep their money under their mattress rather than to be charged for keeping it at the bank.
If your investment horizon is 10 years + there should be no bonds in your portfolio.
https://beta.finance.yahoo.com/chart/SPY#eyJjb21wYXJpc29ucyI6IkVEVixCSVYsQlNWIiwiY29tcGFyaXNvbnNDb2xvcnMiOiIjMWFjNTY3LCNmMDEyNmYsIzk1NTJmZiIsImNvbXBhcmlzb25zR2hvc3RpbmciOiIwLDAsMCIsImNvbXBhcmlzb25zV2lkdGhzIjoiMSwxLDEiLCJzaG93QXJlYSI6ZmFsc2UsInNob3dMaW5lIjpmYWxzZSwibXVsdGlDb2xvckxpbmUiOmZhbHNlLCJzaG93T2hsYyI6dHJ1ZSwiYm9sbGluZ2VyVXBwZXJDb2xvciI6IiNlMjAwODEiLCJib2xsaW5nZXJMb3dlckNvbG9yIjoiIzk1NTJmZiIsIm1maUxpbmVDb2xvciI6IiM0NWUzZmYiLCJtYWNkRGl2ZXJnZW5jZUNvbG9yIjoiI2ZmN2IxMiIsIm1hY2RNYWNkQ29sb3IiOiIjNzg3ZDgyIiwibWFjZFNpZ25hbENvbG9yIjoiIzAwMDAwMCIsInJzaUxpbmVDb2xvciI6IiNmZmI3MDAiLCJzdG9jaEtMaW5lQ29sb3IiOiIjZmZiNzAwIiwic3RvY2hETGluZUNvbG9yIjoiIzQ1ZTNmZiIsImxpbmVUeXBlIjoiYmFyIiwicmFuZ2UiOiIxMHkifQ%3D%3D
Take a look at 2008. Investors scrambled into government bonds for safety, have done so in other crises, and will do so in the next crisis.
As far as hiding money under your mattress, that’s feasible if you have a few thousand. But for pension funds controlling far more cash, they don’t have that luxury. Interest rates in the aforementioned countries have been continuing to drop. What exactly is the floor on these negative rates? It surely isn’t zero. If you have the answer to that riddle, then you could be an overnight millionaire. Good luck!
2008 is a fantastic example. Any who invested in stocks right before the crash, today is better off than the person who invested in bonds. In less than 10 years from one of the biggest financial crisis we have seen that stocks are a better return that bonds.
If your horizon is 10 years, it doesn’t make any sense to have anything in bonds.
If I knew I was gong to die at 80 year old, I would start transitioning into bonds at age 70.
Hey Alain, Good point but don’t forget Bond is here to ‘securise’ the portfolio too. IF stocks enter in a bad period of many months/years, bonds will be there to limit the lost. Here is how i see the think. Il a person now he can take a part of his money at any time, a balanced portfolio is the best (60 growth / 40 bonds) but if a person thinh he didn’t need his monet for a long period (more than 10 years) he can go all-in stocks.
I totally agree with you Konrad. If a person will be invested for more than 10 years, he should be all in stocks. When we add bonds, we reduce volatility but we don’t reduce risk. This is an important differentiation.
What I hate is when an adviser gives 30 % bonds to a person who is in his 30s and who has a good 50 years of investment life ahead of him. This is robbing someone of a big chunk of their possible returns.