Bond Fears

Do you have clients or prospects who desire to have bonds in their portfolio...who should have bonds in their portfolio...yet who are paralyzed by the fear of a rising interest rate environment? Listen up. An investor who has a defined investment horizon, and who desires to hold bonds in their portfolio should NEVER wait...they should buy bonds now, regardless of the current level of interest rates.

In the August issue of the Journal of Financial Planning, two finance professors argue the case for buying bonds now, in an article entitled "Now is Always the Best Time to Buy Bonds".

Here's their argument:

• Bond prices are less volatile than stock prices, and the returns are less than perfectly correlated with stocks. Bonds offer risk-averse investors to generate a steady income stream and provide stability to the portfolio by diversifying asset classes.
• There is NO penalty for investing in bonds, even in a rising rate environment.
• The pure expectations theory states that the current yield curve is an unbiased predictor of future interest rates. In this case, the authors show that the total return from buying bonds now exactly equals the return expected from buying bonds later.
• The liquidity premium theory states that the current yield curve includes not just expectations of future interest but also an additional return called the liquidity premium. In this case, it is shown that postponing investment in bonds reduces total return because the investor fails to receive the available liquidity premium.
• In the portfolio context, now is always the right time to own bonds, because bonds will always be part of a market portfolio.

If you have investors on the "bond fence", and you can't get them off...this is a must article for you. Make a copy. Study it. Find a way to translate and explain the central points such that you can explain it to your intransigent bond investors. You, and they, will be glad you did.

Changing the subject completely...Happy Birthday to Otis Redding, one of the best performers and singers of soul ballads ever!

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