The Aftershock Investor: A Crash Course in Staying Afloat in a Sinking Economy

CHAPTER 5

Bye-Bye Bonds

WHY BONDS ARE GETTING RISKY AND WHEN TO GET OUT

Why do investors buy bonds? To radically oversimplify, the main appeal of bonds is that they are not stocks. Investors buy bonds to preserve capital (also known as avoiding losing money on stocks) and to earn some fixed income (because you can’t count on steady profits from stocks). If the stock market were a jackrabbit, full of excitement and profit potential, bonds would be your steadfast turtle—slow, reliable, and safe.

Financial advisers tell us to have a greater ratio of bonds to stocks as we get older. While a younger person’s portfolio might be 30 to 40 percent bonds, older investors usually go for 60 percent or more bonds, especially as they near retirement. Because the profit potential for bonds is limited, there is a broad assumption that their risk potential is limited as well. Under normal conditions, this is usually true; bonds are generally less risky than stocks. But, as you know by this stage of the book, future conditions will be anything but normal. As inflation and interest rates significantly rise in the lead up to and during the Aftershock, our steadfast turtle will inevitably become investment road kill.

Conventional wisdom (CW) says stick with bonds; they were good to us before and they will remain good to us in the future. The new Aftershock investing wisdom says some bonds may be okay for now, but you better keep your eyes open and get ready to get out as the investment environment ...