All that talk about bond bubbles
October 04, 2010
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Jason Zweig writes in the WSJ about the bond "bubble":
"The bond market is a bubble, and the little guy is blowing it. That has been a constant refrain on Wall Street lately, as retail investors poured over $375 billion into bond mutual funds last year and another $230 billion thus far in 2010—even as interest rates have shriveled toward zero and the risk of future losses has risen. Households also have yanked roughly $70 billion out of U.S. equity funds this year, though the stock market has gained 4%."
However, Zweig points out that most of that money is not coming from sold stocks:
"What they [individual investors] have been doing is responding rationally by moving out of money-market funds. Nearly $500 billion has come out of money funds so far in 2010. Thus, it seems, most people aren't selling off their stock funds to buy long-term bond funds. They are getting out of money markets and inching into short-term and intermediate bond funds."
The problem with all this "bubble" talk is that investors still need an alternative to stocks, if 1) they want to protect money they need in the short term, or 2) they can't stand the volatility and uncertainty of an all-stock portfolio.
For #1, put your money (as Zweig writes) "in a high-yield savings account or a certificate of deposit, not a short-term bond fund. Or buy short-term bonds outright and hold them to maturity." For #2, a diversified, low-cost portfolio of short- to intermediate-term bonds is still the best long-term solution.
Robert Brokamp is the senior advisor for the Fool's Rule Your Retirement service.
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