| Hello Reader, I’m getting a bit fed up with the bond rally—not because I haven’t done really well with it (I have), but because I worry that it’s going to make individual investors even less inclined to invest in bonds than they already are. Funny Thing Individual investors aren’t really getting involved in the bond rally. It’s being driven by Wall Street. When I started The Bond Series, 45% of The 10th Man readers said they had less than 20% of their portfolio in bonds. I suspect that the numbers remain mostly the same.
Investors still seem to prefer expensive stocks over expensive bonds
This is the kind of thing that keeps me up at night (it should keep you up at night). I am a bit fearful that because CNBC is freaking out over bonds, investors might be put off them. I’m a bit fearful that people are more disposed to buying expensive stocks than they are to buying expensive bonds. I’m a bit fearful that this bias toward stocks will really mess people up in the event of a market correction or worse. Here’s the Thing It actually doesn’t matter how you feel about the bond rally, whether you think it’s dying, dead, or just dangerous. Because if you want to understand how the world works, you need to understand bonds. It really is that simple… And that’s what I’ve been doing in The 10th Man Bond Series—trying to help people understand bonds. (Here’s a link to all issues if you want to catch up.) Here’s the Other Thing The bond market is larger than the stock market. This surprises some people. But yes, it is quite a lot bigger. So you need to understand how the bond market interacts with other parts of the market, because bonds often hold the key to the stock market’s next move… Not understanding it means you’re going to be scrambling to react to events you couldn’t predict. I don’t know if you guys know the allegory of Plato’s cave, but basically, the poor mooks are looking at shadows on the wall, thinking the shadows are the real thing, when it’s the puppeteers casting the shadows who are the real thing.
Source: Wikimedia Commons
Not knowing the bond market robs you of any real predictive or analytic capabilities. You’re analysing shadows, without any knowledge of what’s making the shadows. Understanding the bond market not only makes the bigger picture clearer, it can also lead to smarter investing. And isn’t that what we’re trying to do here? Be smarter investors? The point here is, not believing in the bond rally doesn’t mean you should ignore the bond market. And even if you’re (heaven help us) 100% in equities, you still need to understand bonds. Because—once more with feeling—if you want to understand how the world works, you need to understand bonds. Of course, in The 10th Man Bond Series, we’ve only been able to touch on the basics. But there is more coming soon (very soon). Until then,
Jared Dillian
P.S. — The Bond Series has really divided people. Readers have told me everything from “You’re giving people unconscionable advice!” to “Keep at it Jared! You have found a soft spot in investors’ knowledge and they simply cannot afford to be ignorant of bonds.” Want to weigh in? Send your comments to jdillian@mauldineconomics.com. | 