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The recent volatility of the bond market caused some investors to get cold feet and withdraw from both equity and bond markets altogether, taking cover in the relative safety of cash. And they’re in good company, Berkshire Hathaway Inc. chief executive Warren Buffett is currently sitting on $49 billion, his biggest cash hoard ever, according to Berkshire’s latest quarterly report.
But you’re not Warren Buffett and his problems are different to yours. The fact is, for the mere mortal, holding cash creates all sorts of problems as Corrie Driebusch points out in today’s Wall Street Journal.
“The biggest problem with holding cash at low interest rates, is that it grows at less than the rate of inflation, making it a money-losing proposition.” And nobody likes those.
But there are other issues as well. “Once an investor moves into cash, it can be hard to persuade them to put the money back in the markets.” Corrie says.
But investors are rightly concerned about rising interest rates and don’t want to get caught on the wrong side of a bond rout. At the same time the stock market is on a high with stocks looking fairly valued at best. So what are you to do?
Tadas Viskanta of Abnormal Returns has the answer. In a reply to Corries article he said.
“Market timing is a gateway to cash addiction. One need only look at fund return statistics to see that individual investors have a horrible tendency to buy high and sell low. Have a strategic (or even tactical) asset allocation and stick to it. Let the “professionals” wield cash in an option-like fashion. You have better things to do with your time.”
In other words, it’s not your job to play the market, you’re looking for stable long term returns on your money. So develop an allocation strategy that takes into account the nature of your financial goals, your needs, and your ability to take risk. Once you’ve done that, stick to it.
Todays Other Top Stories
Vanguard: – For retirees, low yields may mean the future ain’t what it used to be. – After decades spent trying to save up enough for retirement, many new retirees face a very different concern: How much to spend? The question is especially challenging now that bonds, a traditional staple of retirement portfolios, are providing historically low levels of income. Thankfully, you may have more tools in your retirement toolbox than you thought.
Vanguard: – Bond investing in a rising interest rate environment. – Brian Scott, a senior investment analyst in Vanguard’s Investment Strategy Group, discusses concerns about the bond market and explains why Vanguard believes bonds can play a crucial diversification role in your portfolio, even in the event of a significant downturn.
Learn Bonds: – Why high yield savings accounts are now a better deal than CDs. – If interest rates rise over the next 2 years, a savings account gives you much more flexibility to take advantage of the higher rates.
Morningstar: – 2 ideas for high-yield investors. – High-yield investors might want to consider the closed-end versions of these two funds.
MarketWatch: – Thank Detroit: Muni bonds are a bargain. – Despite what is happening in Detroit and what a certain blonde, prognosticating analyst believes, investment-grade municipal bonds look relatively cheap at current levels.
Barron’s: – Masters of the junkyard. – No doubt about it—junk bonds have been among the winners in this year’s credit-market selloff. They’ve shrugged off interest-rate worries in ways that corporate bonds and Treasuries have not—to say nothing of municipal bonds. While that’s great news for junk-bond index funds, it’s even sweeter for some other folks. Many junk-bond fund managers have handily beaten the benchmark.
Bloomberg: – Biggest 30-to-10 spread since 2011 prompting buyers: Muni Credit. – The longest-term municipal bonds offer a buying opportunity, analysts at JPMorgan Chase & Co. and Citigroup Inc. say, as yields reach a two-year high following Detroit’s bankruptcy and concern over the Federal Reserve curbing bond purchases.
Financial News: – Investors plumb the depths of high yield. – European high-yield investors are firmly in “risk-on” mode, with issuance patterns for the year to date showing strong appetite for new deals at the lower end of the ratings spectrum.
Bloomberg: – Michigan muni fund lost 5% of assets as Detroit went bust. – The biggest Michigan-focused municipal-bond fund lost 5 percent of its assets to net withdrawals last month as Detroit sank into bankruptcy, according to Morningstar Inc.
WSJ: Michigan sees biggest muni bond sale since Detroit bankruptcy. – Investors signaled they are willing to dip a toe in the unsettled Michigan municipal-bond market for a price, buying $18.7 million of school-district debt in the state’s largest sale since Detroit’s bankruptcy filing.
Professional Pension: – The AA bond effect. – The murky world of IAS19 is often difficult for non-accounting bodies to understand, with no aspect more difficult than the determination of the discount rate. The discount rate is used to calculate future liabilities and should reflect the time value of money, the currency and the estimated timing of benefit payments. The guidance to calculate the time value of money is to use the yield on high quality corporate bonds. These have been considered to be AAA and AA bonds.
InvestorPlace: – Inverse bond fund in a powerful bull market. – It’s no longer possible to render a precise upside target for TMV, but prices appear headed higher.
Bloomberg: – High-yield bond rally heads for seventh week on Europe stimulus. – Junk bonds are rallying for a seventh week, the longest streak since January, amid confidence that European central banks will maintain stimulus measures even as the economy emerges from recession.
WSJ: – Safe bonds slide as economic data proves upbeat. – The world’s safest government bonds are under pressure, in a sign of growing confidence in the global economic recovery.
Kiesel: Favor US vs German yields at current valuations.
— PIMCO (@PIMCO) August 15, 2013
Anyone willing to wager where 10 yr yields will be going into FOMC decision on Sep. 18? My bet 2.92%. #10yr@FOMC
— Mike Jackson (@bondscoop) August 15, 2013
#Muniland "@calbano_BB: Back in the red! Muni money funds lose $1.02B this week after highest weekly flow in over a year – $3.84B last week!
— Cate Long (@cate_long) August 15, 2013