The Truth About Bonds

Bonds: Are They Really "Safe" Anymore?

The Dow Jones Industrial Average (DOW) plummeted almost 40% in about 30 days. THEN it came screaming back to within a few percentage points while making huge back and forth gains and losses ("whipsaw" is the term used to describe a volatile market). 

A lot of retirees are asking their brokers/duly registered advisors "Where do I put my money"??? And the broker/duly registered advisors are running to bonds as a historical "safe" haven. But lets take a look at what is going on since 1980 with interest rates and bonds. 

First a little education:

Bond Value and Interest Rates are like opposite ends of a teeter totter (as a youngster I loved being on teeter totters. They are SO much fun. Alas, because of my sized no one ever wanted to be on the other end because they would "accidentally" get stuck in the UP position (but that's another story altogether)). It looks like this:

So when the Federal Reserve (which is neither "Federal" or has a "Reserve") lowers interest rates the value of your bond goes up. Conversely, when the Federal Reserve (which is really a conglomerate of private banks) RAISES interest rates your bond value goes DOWN.

When the interest rate gets lowered: When you buy a bond for $100 you get an interest rate which is also referred to as a "coupon rate". Let's say your $100 bond has an interest rate of 5%. If the Federal Reserve LOWERS the interest rate your bond becomes more valuable b/c you could sell it for say $110 (making a profit of $10).

When the interest rate gets increased: Take that same $100 bond and the interest rate gets increased than your $100 bond would be worth only $90 (why would anyone buy your $100 bond when they could get it for $90? They wouldn't.) and you would sell at a loss.

As one goes up the other goes down. Teeter totter....teeter totter...teeter totter.....

"This is giving me a headache!"

"So what?" you might be asking. Well, would you think that the history of how the Federal Reserve raises and lowers rates might be just a little important before you take the word of your broker/dually register investment advisor and put your nest egg into bonds?

You bet it's important! 

So lets take a look:

As you can see here when the back in the 1950's the interest rate was near zero and climbed higher and higher for about 30 years all the way OVER 20%! That means if you bought a bond in 1980 and held it to maturity you gained over 20% with NO RISK! Ahhhh the good ole days.

Take a look at 2020 and where we are now. The interest rate is LESS than 1% (.09% at the time of this article). 

Why would a lower interest rate NOW be of concern for someone who is about to funnel their funds into the bonds? 

What happens when the Federal Reserve raises interest rates? What happens to your bond? Yep. It goes DOWN in value. 

Take a look at that chart again. Where are we in comparison to history? Well, besides 2008, we are at the LOWEST interest rate since the 1950s. 

Did you hear that? 

The interest rate (besides 2008) is the LOWEST it's been in 70 YEARS!

Is it POSSIBLE that the Federal Reserve (or FED) is going to RAISE interest rates sometime soon? Do you think the over $2,000,000,000,000 (that's trillion) we JUST printed out of thin air because of COVID 19, do you think that the FED wants to raise interest rates on America for the loan they just gave us?

You do the math. 

Watch yourself out there. Brokers/dually registered investment advisors are using 50 year old strategies with you retirement funds. "Modern Portfolio Theory" is what it's called and it just doesn't work in your retirement. 

Don't take my word for it. 

Look at the numbers. Numbers are pesky little things because they don't have emotion. 

WE give them emotion. 

Doing something the same way just because you've always done it that way doesn't make it right going forward.

For more information call or visit www.clcinvestmentadvisors.com 

David Cadarette is a registered Fiduciary Investment Advisor Representative with the Securities & Exchange Commission (SEC) and is the CEO of CLC Investment Advisors, LLC with offices in Petoskey, Boyne City, Mount Pleasant & Traverse City, Michigan. He currently lives in Charlevoix Michigan with his family. 

For answers to other questions or to learn more visit: www.clcinvestmentadvisors.com