The Biggest Blunder Investors are Making Right Now
Mike Desepoli, Heritage
It’s not all their fault, though, as information is often dumbed down in the interest of simplicity. As Einstein said: “Everything should be made as simple as possible but not simpler.”
Unfortunately, often the information provided to average investors has been simplified below the bare minimum. To avoid the blunder, average investors need a bit of sophistication.
To fully understand how to avoid the blunder, let us first illustrate the point. Read on for the blunder and how to avoid it.
The dirty little secret
Many average investors believe the myth that bonds are safe. There is some truth to the understanding that bonds are safer than stocks, but average investors miss an important nuance. If you buy an individual Treasury bond or a bond of a company with a solid balance sheet and hold it to maturity, you will get your principal back. However, this is not the case when you buy mutual funds or ETFs.
Asset Allocation? What asset allocation
Many average do it yourselfers are advised to start with 60% in stocks and 40% in bonds. Of course, adjustments are made based on age and objectives. Investors are told that stocks are for growth and bonds are for safety and income. Many average investors do not understand that they can lose a lot of money in bonds.
All good things come to an end
Bonds have been in a 30-year bull market. For this reason, the bad advice given to investors has not hurt them so far. However, average investors need to know that the bull market has ended.
The big blunder
As stock market volatility has risen, many average investors who want safety are moving out of stocks into bonds. They are doing so because they do not understand the following:
- They can lose money in bonds.
- Interest rates are rising.
- Bonds move inverse to interest rates. In plain English, when interest rates go higher, bonds go lower.
- Stocks are experiencing volatility because of rising interest rates.
What to do now
First and foremost, do not buy bond funds or ETFs.
Second, it helps to understand that most funds and popular ETFs are concentrated in a handful of stocks that have run up and now pose a high risk.
Third, if you don’t know what you’re doing always consult with a professional.