In one of the earliest posts on this site, I wrote: “Bond Fund – ‘Bonds’ are essentially loans that you give to a company. In return, these companies pay you interest. A bond fund is a nice mix of short- and long-term bonds of good companies that pay a rate of interest beating inflation. Almost everyone should own at least some bonds in their investment portfolio.”
Times have changed.
While short-term bond funds are still reasonable, those holding medium- and long-term bonds - and especially bond funds that contain government debt - should strongly consider getting rid of them.
During the credit crisis and still today, the retail investor stayed away from stocks entirely, shunning the very word “equity mutual fund.” This of course resulted, and is still resulting, in excellent bargains for some areas in equities. But, where did all the retail investors go?
Retail investors did not buy stocks, as indicated previously. They certainly did not and are not buying real estate, even in the bargain zone that is the USA. Instead, they bought gold (hence ridiculous current prices), money market funds, bond funds, and government debt.
Whenever the retail investor shun a large asset class like stocks, other areas grow bloated and overpriced. As the chart below indicates, whenever the financial news was worst, investors bought bonds the most (bond yields decline when purchases increase).
(click to enlarge)
If you want income-producing investments, consider purchasing those investments that remain deeply unpopular in today’s market: dividend mutual funds or ETFs (consisting of dividend-paying corporations) such as SDY and DWX; Real-Estate Investment Trusts such as IYR; Mortgage Bonds (which are currently being avoided like the plague) such as MBG and VMBS; and, stocks of large oil and gas companies (that are backed by hard assets and typically also pay a dividend) such as CVX and BP.
Like the gooey, sticky mess in the 1950s classic, “The Blob,” the long-term bond market is currently bloated from gluttony, and only a cooling off period can stop it.
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"When a horse learns to buy martinis, I'll learn to like horses."
Steve McQueen, actor
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Disclosure
Do not buy stocks, sell short, or take this or any other financial advice without doing your own analysis; including, but not limited to: reviewing business models, financial statements, management style and philosophy, recent developments, market macroeconomic analysis, and chart analysis. If you do not know how to do these things, you shouldn't be buying stocks in the first place. Seek the advice of professionals, as appropriate.
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