Invest: Beware this Bond Bandwagon
FIXED-INCOME INVESTORS have a tendency to act out of fear. They plow billions into bond funds when they want to hide out from a bad stock market, then flee when they’re scared of missing out on big equity gains. But fear, it turns out, is a terrible timing tool. As the chart shows, when huge amounts are pulled from bonds, it foreshadows a good year ahead for fixed income. And when record sums come pouring in — as has been the case recently — losses often follow. At the very least, there’s a good chance you’ll miss out on bigger opportunities in the stock market. ■
| 1994 BOND RETURNS -4.7% | 1995 BOND RETURNS 15.5% | 2001 BOND RETURNS 5.4% | 2003 BOND RETURNS 6.7% | 2010 BOND RETURNS ? |
| 1994 STOCK RETURNS -1.8% | 1995 STOCK RETURNS 30.9% | 2001 STOCK RETURNS -12.4% | 2003 STOCK RETURNS 33.8% | 2010 STOCK RETURNS ? |
| WHAT WENT WRONG | WHAT WENT WRONG | WHAT WENT WRONG | WHAT WENT WRONG | WHAT COULD GO WRONG |
| Rising Rates: Investors piled into fixed-income funds just before the Fed doubled interest rates, slashing the value of bond portfolios. Stock funds held up better. |
Fear: Those who fled bonds in ’94 fearing losses missed out on double digit gains in ’95. Yes. stocks did better. But it was one of the best years ever for bonds. |
Greed: Money was yanked from fixed income to chase tech stocks. But the bubble burst that year, and bonds would go on to beat equities for the decade. |
Rearview Investing: In the bear, investors gave up on stocks and raced into bonds-just as a new bull market was born. Bonds made money in 2003, but nothing like stocks did. |
Risks Abound: You already missed 2009’s 33% jump in stock funds. Plus, rates are set to rise while credit woes linger. And can bonds beat stocks for another decade? |
Notes: Investments represent net new inflows into all bond funds. Returns are based on average stock and bond fund gains. 2010 projection is based on investments as of March 24 sources: Cl, Morningstar
Graphic illustration: CARL DETORRES