By Christopher Fitch 
There are several points in time where people should find bonds extremely attractive. Unfortunately, midway through 2010 is not one of those times, although one would believe by the outflows of cash from equity based mutual funds into fixed income based mutual funds that this is untrue. Here are three reasons why investors should avoid bonds at this point in time unless, of course, they are willing to hold the actual bond until maturity.
1. Rates. With interest rates at the lowest they have ever been, the only obvious direction they can head is up. In fact, there has been an evident trend over the past several decades that rates were on their way down -- the past decade has shown the clearest signs of a dropping rate trend. Over the past four to five years, that trend has slowed and leveled off. If an investor were to look at bond rates the way one would look at stocks, the trend line suggests quite clearly that rates are about to reverse their trend.
2. Yield Curve. The yield curve is an indicator that is created by bonds themselves. It plots the difference between three month bond yields all the way up to the thirty year bond yields (and everything in between). The current bond yield is telling us that we are about to enter a period of economic expansion. This is in line with what economists have been saying for over a year. The only thing standing in the way of an economic expansion is that technicality known as time. Once the economy starts to expand, rates are guaranteed to increase, resulting in lower market values for bonds.
3. Bond bubble. With so many people shifting money into bonds, many market observers have called this asset class the next "bubble." They draw similarities between tech stocks in the late 90's and early 2000's, to oil in the year 2000, real estate in the year 2006 and so on. Following the popular asset classes will always yield negative results and with so many strong indications to suggest that this asset class is one to avoid, investors would be wise to tread this area extremely carefully in the coming years.
While bonds and the fixed income asset class are a necessary evil in terms of building a properly diversified portfolio, investors need to exercise extreme caution when investing in these areas. These are just three of the strongest arguments for why this asset class should be avoided or, at the very least, exposure should be strictly limited.
There are several points in time where people should find bonds extremely attractive. Unfortunately, midway through 2010 is not one of those times, although one would believe by the outflows of cash from equity based mutual funds into fixed income based mutual funds that this is untrue. Here are three reasons why investors should avoid bonds at this point in time unless, of course, they are willing to hold the actual bond until maturity.1. Rates. With interest rates at the lowest they have ever been, the only obvious direction they can head is up. In fact, there has been an evident trend over the past several decades that rates were on their way down -- the past decade has shown the clearest signs of a dropping rate trend. Over the past four to five years, that trend has slowed and leveled off. If an investor were to look at bond rates the way one would look at stocks, the trend line suggests quite clearly that rates are about to reverse their trend.
2. Yield Curve. The yield curve is an indicator that is created by bonds themselves. It plots the difference between three month bond yields all the way up to the thirty year bond yields (and everything in between). The current bond yield is telling us that we are about to enter a period of economic expansion. This is in line with what economists have been saying for over a year. The only thing standing in the way of an economic expansion is that technicality known as time. Once the economy starts to expand, rates are guaranteed to increase, resulting in lower market values for bonds.
3. Bond bubble. With so many people shifting money into bonds, many market observers have called this asset class the next "bubble." They draw similarities between tech stocks in the late 90's and early 2000's, to oil in the year 2000, real estate in the year 2006 and so on. Following the popular asset classes will always yield negative results and with so many strong indications to suggest that this asset class is one to avoid, investors would be wise to tread this area extremely carefully in the coming years.
While bonds and the fixed income asset class are a necessary evil in terms of building a properly diversified portfolio, investors need to exercise extreme caution when investing in these areas. These are just three of the strongest arguments for why this asset class should be avoided or, at the very least, exposure should be strictly limited.
| --> Consider Growth Funds as an alternative to bond funds. Visit the Mutual Fund Site for more information. With more than 17 years of financial services experience, Chris is currently the owner of the Mutual Fund Site.org. As well, he manages Gym Exercise Machines.com, a website that provides conversational Elliptical Trainer Reviews. Article Source: http://EzineArticles.com/?expert=Christopher_Fitch |
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