Bond Strategies for Those Fearful of Inflation
by Stan Richelson and Hildy Richelson
The media warns investors not to buy bonds because inflation is coming, interest rates will rise and the value of bonds will fall.
The brokerage houses “mark to market” your bond portfolio every day, creating an awareness of portfolio valuation in the hopes that you will trade to take gains and sell losses. Depending upon a number of factors, including the frequency with which a particular bond has recently traded, these valuations may be more or less accurate.
In this article
- Inflation Is the Upside Case
- The Case for Premium Bonds
- The Cost of Waiting
- Building a Ladder in a Low- Interest-Rate Environment
- The Possibility of Deflation
- Bond Mutual Fund and ETF Strategies
- Our Personal Investment Strategy
- Be Wary of Esoteric Securitized Bonds
- Bond Strategies for 401(k) Plans
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In the trading process, you incur substantial costs and the brokers make money. You may or may not make any money. In fact, there have been numerous studies showing that if you trade, you lose money. Daniel Kahneman, the 2002 winner of the Nobel Prize for economics, states in his book “Thinking, Fast and Slow” (Farrar, Straus and Giroux, 2011) that “Many individual investors lose consistently by trading, an achievement that a dart-throwing chimp could not match.”
From our perspective, cash flow, not trading gains and losses, is the key consideration for individual investors. However, focusing on cash flow instead of gains and losses requires concentration, because it is a different gauge of success than those normally employed. Cash flow will not start an exciting conversation at a party. When you use cash flow as a measure, sitting in cash waiting for interest rates to go up is not a sensible strategy unless you can correctly forecast that interest rates will go up very soon. If your prognostication is incorrect, you will lose a great deal of cash flow investing at near-zero interest rates in short-term or money market instruments in today’s market.
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Hildy Richelson is president of Scarsdale Investment Group, a registered investment adviser based in Blue Bell, Pennsylvania, that specializes in fixed-income investments. Hildy and Stan Richelson are co-authors of several books on bonds, including “Bonds: The Unbeaten Path to Secure Investment Growth,” Second Edition (Bloomberg Press, 2011).