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Wednesday, December 15, 2010

An ETF Bond Investment Strategy For the New Year

An ETF Bond Investment Strategy For the New Year ; Then – as now – the United States was in a deep recession. In November of that year, in fact, the unemployment rate actually hit 10.8%. There are differences, however. Whereas today the U.S. stock market is fairly close to its all-time high, in 1982 it had been dropping in real terms for the preceding 16 years, and had lost almost three quarters of its value.

Then there’s gold. In 1982, gold prices were falling – not rising to record after record, which is the case today. Inflation, too, was falling – and sharply: From 8.9% in 1981 to 3.4% in 1982. Finally, short-term interest rates were extremely high, far above the level of inflation, though the average for 1982 at 12.24% was well below the 1981 average of 16.39%.

Just as in the 25 years from 1982 you could do better in Treasury bonds than in stocks if you bought long enough maturities (preferably 30-year zero-coupon “strips”) so the downside risk in bond investment today is in many cases greater than that in equities.

With inflation declining and short-term interest rates extremely high, the chance for a bond-market rally was excellent. The 30-year Treasury bond yield – which had peaked at 15.32% in September 1981 and was still at 14.30% in June 1982 – had by December 1982 fallen to 10.54%.

And a rally was what investors got. In fact, in the 25 years that followed, the investors in our simplified example who bought Treasury bonds (especially long-maturity bonds such as 30-year zero-coupon “strips”) trounced those who chose stocks. Read More... For the latest updates PRESS CTR + D or visit Stock Market news Today

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