This “Safe” Investment Could Blow Up Your Portfolio
A prominent trader just shared an inside story with me…
He’s a well-known trend following fund manager.
And he says financial advisors are ringing his phone off the hook.
They’re in a state of panic and need his immediate help.
You see, a sector of the “safe” investment universe is in danger of blowing a hole in investors’ portfolios… and advisors are desperate for a solution.
It’s an extremely precarious problem purposefully hidden from most mainstream investors.
And advisors are in a feeding frenzy trying to fix it before investors freak out over the truth…
Bonds Are Broken
For decades, Wall Street has put nearly all investors into the traditional 60/40 split between stocks and bonds…
The sales pitch is simple…
Stocks are the portfolio workhorse, bringing in growth and capital appreciation. You want them as the largest potion of your portfolio to maximize gains.
But you also need to offset the downside risk of stocks, i.e. the S&P 500 index has cratered 50% twice in the last 16 years.
And that’s where bonds come in…
Bonds are the so-called “sleepy” part of your portfolio. They’re designed to provide safe, reliable income, acting as a hedge against stock price volatility.
The decades old Wall Street pitch is that clients can collect their 5% yield on their bonds with almost zero risk.
Forty-percent of your portfolio is thus rainbows and unicorns, so just relax with happy thoughts…
Every last boomer is sold that fantasy.
But now the rug is being ripped out from under their feet. And nobody is sending the memo that “low risk” bonds will leave you in dire straits.
Look, after more than seven-plus years of zero rates and, more recently, negative rates, bond yields are a historical artifact.
Central bankers’ unprecedented debt purchases have further eaten up supply and left investors with few options. That’s jacked up bond prices and lowered yields. (Bond prices have an inverse relationship to yields.)
Yet with so much fear and uncertainty in the markets, investors at the direction of nefarious forces keep flooding into “safe” bonds …and that puts even more downward pressure on yields.
The predicament is that investors are set up for huge losses the moment rates go up even a little from current levels — and they will rise.
To borrow from Nassim Taleb, there is nothing “antifragile” about bonds. Bonds will not benefit from a shock nor will they thrive when exposed to coming volatility, randomness and disorder—not at these yields.
How rough will it get?
Bank of America calculates that a mere half-percentage point rate increase will result in more than $1.6 trillion of bond market losses.
If that sounds low risk to you, can I suggest that perhaps you are Dorothy skipping down the yellow brick road singing to yourself?
The bottom line: Bonds are broken. They offer all danger and no yield. And advisors are in a do-or-die race to find any alternative.
An Easy Fix
So why are financial advisors contacting my friend, a trend following fund manager, for help with their bond problem?
At first blush, there doesn’t appear to be any connection between these two investments.
However, any advisor worth a damn knows trend following offers an understandable risk profile along with significant return… a profile bonds used to have before central bank bastardization.
Trend following has stable benefits because it diversifies across an extremely broad range of markets, including stocks, ETFs, bonds, currencies, futures and commodities, i.e. gold, coffee, Tesla — you name it.
You see, different market sectors react differently to the same events. If some sectors are down, others will be up to offset those losses — the trend following secret to profits.
Plus, trend following invests in up or down markets, riding waves both higher and lower for gains.
So with 40% of your portfolio now in peril, let me be very blunt: You will not get trend following benefits AFTER the bond blowout.
This is why some “awake” financial advisors are learning through sheer despair that trend following is an immediate alternative to massive bond risk.
Yeah, I get it, it sucks. You were sold the “Big Lie” about bonds.
But I am throwing you a life preserver.
Please send me your comments to email@example.com. Let me know what you think about today’s issue.