If financial forecasts prove accurate, bond funds are set to devalue. The bond bubble 2011 may or may not burst, but a good strategy for investment can address the danger. First, take a look at what caused this situation. During the recession, riskier funds such as stocks plummeted in value. Many investors saw their retirement savings crumble. This caused an exodus to more secure investments with guaranteed interest.
These provide a relatively safe environment guaranteed by the government. Pensioners traditionally seek a secure haven because they cannot afford volatility in the savings they rely on for monthly income. Therefore, these funds are reputedly humdrum, not much interest to investors who want to generate wealth, but the crisis drove many to look for a safer approach. Because bond funds are reputed to reduce volatility, they have become a more popular part of many financial portfolios. With bank interest rates low compared to the guaranteed income, share prices have become relatively high.
2011 Bond Bubble - Protection Is Not Without Risk
Like any financial tool, it is not risk-free. The most common hazard is that the institutions issued them will not pay up. As recent events have shown, the most influential corporations can declare bankruptcy. Nobody expects government to fail because they can print currency to fulfill their commitments, but even they have been known to default on their debts.
Bond prices are high now and will probably remain so as long as interest rates stay low. Government banks throughout the developed world have kept them low as possible because this restricts inflation. This makes a good environment for this type of investment, but if interest rates rise, securities prices will disintegrate and the bond bubble 2011 may burst. The term bubble suggests something more extreme than a run-of-the-mill increase that must eventually correct itself. Prices are relatively extreme, maybe 25 per cent above normal.
In Case The Bubble In Bonds Bursts
In case the bubble bursts, investors should choose to reduce their reliance on this market in 2011. A good alternative is stocks and money markets paying dividends of between two and 3 per cent. Income funds may pay within the same range, but as interest rates increase, bonds will decrease in value and money markets will go up. Avoid eliminating them altogether. After all they are a good insurance against unpredictable volatility. Looking forward, invest equally in short and intermediate term bond funds. If the market deflates and investors sell off, the long-term securities will suffer the most, so avoid them. Also, avoid highest-quality funds invested in government treasuries. Although they pay less interest, they will suffer the same fate if interest rates rise.
The purpose of investing in income funds is not to get rich, but to receive decent interest income without serious risk. So avoid paying sales charges to keep the cost of investment low. Inexpensive and well diversified bond index funds offer a good option.
Investors can take advantage of the potential decrease in price of bond funds. With some investment in a money market and some in a medium-term bond fund, make equal transfers each month from the money market to buy shares in the bond fund. If bond bubble 2011 deflates, this dollar cost averaging approach will acquire more shares as the fund price falls. These are a few ways to protect against the bubble bursting and even take advantage of the market situation.