Saturday, September 11, 2010

Head for the Hills!

HEAD FOR THE HILLS!!.... Well, at least that's what a lot of small individual investors are doing these days, according to this article. Scarred by two crashes in two years, underperforming mutual funds, and downright scary monthly account statements, individual investors have thrown in the towel on the stock market.

Jack Sparrow Running from the Natives


That's right, they have completely given up making money on stocks. What have they decided to put their money in?

BONDS.

So what do you think? Good idea? Bad idea?

Well, I'm gonna make a ruling on this one.

Bad idea. Bad idea. BAD IDEA.

Why's that? Bonds offer consistent returns. They're safe, right? You can't lose money in them, right?

WRONG.

I'm not even gonna get into the safer argument here, because let's face it -- as much as people worry about the imminent collapse of the U.S. economy because of the enormous burden of debt that we owe to the entire world, it just ain't gonna happen. That's right, there's absolutely no way that the U.S. government will default on our debt. No one in the world wants that to happen. No one in the world will let that happen... But if it does happen, wondering what financial assets to buy is the least of our problems.

So ignoring the scenario of armageddon, let's get into the "you can't lose money in bonds" discussion.

Whoever says you can't lose money in bonds is wrong. You can.

First of all, the yield on bonds these days is so disgustingly low, I don't know why you would actually want to buy them. Everybody is afraid and is fleeing to bonds for shelter, driving the price of the bonds up and therefore driving the yield that bonds return WAY WAY down. If you keep the bonds for 10 years or 30 years (whatever the maturity is), you will make the collective yield on the bonds... however small it is. But if you decide to sell out of those bonds sometime before the maturity date, the price of the bonds could go down dramatically. This is especially the case if some government defaulting goes down.

And that's exactly what that article is talking about. They're saying that so many people are buying up bonds at such a rapid rate these days, driving the prices up so high, that a NEW BUBBLE is being created.

That's right.

You thought the stock market bubble burst in 2000 was bad. Wait till you see the government bond bubble burst. The fallout will be magnificent.

The consensus is that such an event would coincide with an enormous bull market in stocks, as people would pull their money out of bonds to put into "riskier" plays in the stock market. Others might say that people will just pull their money out of bonds and stocks altogether and put it into gold or oil or some other store of value.

Which scenario will play out?

Who knows... but we don't need to know. Whether the stock market soars in the future, or sinks like the Titanic, we trend followers will be there to reap FANTASTIC rewards from the resulting price trends. These are great times for trend followers. Big things are brewing on the horizon. You can make a LOT more money just riding price trends up and down in the stock market.

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