Iai??i??m not the kind of guy who throws money away. In fact, Iai??i??m just the opposite.
When I run or bike for exercise — and I try to do it at least four or five days a week — I always keep an eye on the ground.
Not because Iai??i??m afraid Iai??i??ll trip or puncture a tire. But because you never know when youai??i??ll find a penny, a nickel, a dime, or a quarter just lying there.
Heck, I probably find at least some change every other time I go out. Thatai??i??s free money ai??i?? money some other careless person just tossed away, dropped, or otherwise couldnai??i??t be bothered to save. By putting it in a jar when I get home, I manage to bank a nice chunk of change over time.
That said, itai??i??s not like Iai??i??ll walk into the middle of an intersection when cars are speeding by to pick up a dime. And I wonai??i??t duck under the gate and run across the tracks near my house to grab a nickel when a train is barreling down. Thatai??i??d be crazy!
Unfortunately, I see all too many investors getting swept up in the investment equivalent of that behavior. Itai??i??s called ai???picking up dimes in front of a steamrollerai??? — and it can be especially painful in the interest rate markets.
What do I mean? Well, the 30-year Treasury Bond is yielding around 3% right now. The 10-year Treasuryai??i??s payout is even lower at 2.4%. The benchmark iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) was recently yielding around 3.5%, while the Vanguard Tax-Exempt Bond ETF (VTEB) that owns municipal bonds was yielding 1.8%.
Meanwhile, consumer prices rose 2.7% year-over-year in the most recent month. Even so-called ai???coreai??? inflation (excluding food and energy) is hovering around 2.2%.
That means VTEB and the 10-year Treasury feature NEGATIVE ai???realai??? (inflation-adjusted) yields. LQD and the 30-year are barely positive. Or stated another way, youai??i??re getting nickel and dimed to death at best — or losing purchasing power at worst — with these investments.
Then thereai??i??s the issue of interest rate risk — the ai???steamrollerai??? headed right for you in this rising-rate environment.
When inflation and interest rates climb, the value of longer-term bonds, bond ETFs, and bond mutual funds drops. The bigger the rise in rates, the bigger the fall in value.
Between July and December of last year, the LQD lost more than 5.5% of its value. Thatai??i??s even AFTER taking into account interest payments you received. VTEB fell 4.6% on the same basis. The 10-year Treasury dropped almost 7%, while the 30-year bond sank 14%.
My advice in this market environment is simple: Stick with interest rate investments that offer either more yield or more protection from rising rates. Or better yet, buy investments that actually RISE in value when interest rates climb and bond prices fall. Believe me when I tell you they do exist, and theyai??i??ve been spinning off some very handsome profits lately.
You can find all the details in my brand new information-packed course, How to Pile Up Profits from the Greatest Interest Rate Cycle in 5,000 Years. It contains everything you need to know about:
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If you havenai??i??t already checked it out, I urge you to do so by clicking here. And by all means, make sure youai??i??re careful when picking up loose change ai??i?? on the side of the road OR in the investment markets. The penalties from taking too much risk for too little return can be severe.
Until next time,
Mike Larson is a Senior Analyst for Weiss Ratings, and is also the creatorAi??of the courseAi??”How to Pile Up Profits from the Greatest Interest Rate Cycle in 5,000 Years“. A graduate of Boston University, Mike Larson formerly worked at Bankrate.com and Bloomberg News, and is regularly featured on CNBC, CNN, Fox Business News and Bloomberg Television as well as many national radio programs. Due to the astonishing accuracy of his forecasts and warnings, Mike Larson is often quoted by the Washington Post, Chicago Tribune, Associated Press, Reuters, CNNMoney and many others.