March 27th, 2013 12:22 EST
Bond Crash Dead Ahead: Tick, Tick, Boom! What Does This Mean For The Market?
Paul B. Farrell is a Market Watch behavioral economics columnist and an author of several books on personal finance. On March 21st, his Market Watch column headline read:
"Bond crash dead ahead: tick, tick, boom!"
Farrell credits InvestmentNews with the sensationalism, but certainly accepts the premise that rising interest rates will cause fixed income securities of all kinds to fall in price and that there will be a huge decline in the market value of retirement income portfolios.
(By the way, this is the normal behavior of interest rate sensitive securities --- make sure you understand why.)
Keep in mind that both the investment media and most financial advisors are "total return" focused --- and thus totally in denial about the purpose of income investing. The impact of rising interest rates on the actual income received by retirees is not mentioned anywhere in the entire Farrell doomsday report --- perhaps because it should be rising!
As many of you have learned, and as all Market Cycle Investment Management (MCIM) methodology users know firsthand: Managed Income CEFs afford investors the opportunity to benefit from rising interest rates by adding to their existing income portfolio holdings to, at the same time, increase their yield and decrease their cost basis per share.
"Investors have no idea what`s about to happen."
The Farrell article moves on, quoting Business Week, Bloomberg and several other noted financial contributors, painting a doom and gloom scenario that (get this will ya) InvestmentNews says brokerage industry regulator FINRA is so very concerned about that it issued this "investor alert":
"Many economists believe that interest rates are not likely to get much lower (duh) and will eventually rise. If that is true, then outstanding bonds, particularly those with a low interest rate and high duration (i.e., a far off maturity date), may experience significant price drops as interest rates rise along the way."
(Masters of the obvious and clearly well schooled on the relationship between bond prices and interest rates; just perhaps, the public may have been better served if FINRA had suggested to brokerage firms that they should be recommending income CEFs to their customers.)
So now we have government bureaucrats issuing warnings to investors about the potential death of the bond market. How many of the people in the Farrell article are investment managers? Retirement account portfolio managers? How many have read "The Brainwashing of the American Investor" without even realizing that they are inside!
MCIM Methodology Practitioners Can`t Wait, Bring It On!
To be a successful income investor, you need to follow the same QDI (quality, diversification, and income) rules as demanded by equity investing but: your primary focus needs to shift from profit-taking to income production. Wall Street, FINRA, and investment writers like those quoted and talked about in the Farrell article, want you to focus on the market value of the portfolio, period.
Thus, they totally disassociate themselves from both an appreciation of the cycles involved, and the strategies needed to deal with these gifts from Mother Nature`s cyclical twin sister. Her message is much too simple, certainly for MPT spouting economists and expert "Big Journalism" reporters.
There are no victims among the income investing opportunists who follow her cyclical directives, as follows:
"When I bring you higher equity prices, take reasonable profits and wait patiently for new (IGVS) buying opportunities to arrive --- repeat the cycle again, and again, and...."
"When I bring you higher yields in quality income CEFs than you can get anywhere else, take advantage of my good nature and treat a year`s-income-in-advance-profit as a special gift from the investment gods --- compound your gains immediately and in similar securities. At high price levels, buy fewer shares initially than normal."
"When higher interest rates translate into lower share prices, use your income to buy more shares, but never by means of automatic reinvestment --- be selective based on yield and total cost basis."
If you could buy the same bonds, preferred shares, mortgages, etc, that you own now, at lower prices, thus increasing your yield and your total income while reducing your cost basis, wouldn`t you? Is the regulatory posse going to force us to sell perfectly sound paper in anticipation of higher rates down the road?
Over the past seven years, leveraged (not a four letter word), managed CEFs (both taxable and tax free) consistently made their payments to shareholders at rates three to four times higher than those safe individual bonds that the Market Watch article is warning you about....
Yes, they fell more than usual in price during the financial crisis, but the cash flow continued unabated in hundreds of individual CEFs... right now, after a huge market value advance, many are paying an after-all-fees rate above 6% while your broker insists that 2% individual securities are better.
Wake up income investors, higher yields are out there right now, and with higher rates around the corner, they will only get higher! Check it out, and pay a little more respect to the investment gods in your income portfolio`s future.
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Bond Crash Ahead says Market Watch