In last week’s State of the Market video, I talked about how there’s no such thing as a Goldilocks, or “just right,” market. Investors often think the market is too hot or too cold to put new money to work.
You can always find a reason not to invest. But there’s a way you can invest your cash, earn interest and not worry about losing money.
Notice I didn’t include the word “funds” after. Like Elvis and the hound dog, bond funds are no friend of mine. I’m not a fan.
If you invest in a bond fund and rates go higher, you are nearly guaranteed to lose money because bond prices fall as interest rates rise. As a result, the value of the bond fund will fall as well.
If you own individual bonds, the same is true (bond prices will fall if interest rates go higher), but that is irrelevant if you plan on holding the bonds until maturity.
Bonds mature at $1,000 no matter where they trade beforehand. You could own a bond that’s a real dog and trades all the way down to $800. And at maturity, it will be redeemed for $1,000.
The only way that won’t happen is if the company goes bankrupt. So barring that rare occurrence, bondholders will get their money back – or earn a profit if they were able to buy the bond at a discount – and collect income along the way.
Here’s why I’m so excited about bonds now. After years of record-low interest rates, bonds are finally sporting decent yields. You can get bonds of high-quality companies with 6% or 7% yields. I’m talking about companies like JPMorgan Chase and Ally Financial.
And the timing couldn’t be better.
Currently, the economy is strong. Despite everyone’s fears of recession, unemployment is near record lows, wages and productivity are rising, and more dollars are being invested in the U.S. by overseas companies than ever before.
Inflation is still too high, and I suspect it is not under control yet. So we could still get some more interest rate hikes, but we are likely going to see the end of the rising rate environment. And should the economy sputter and we fall into recession, rates will come down, which will make the bonds that you hold more valuable.
If you own a bond yielding 6% and interest rates drop next year, an equivalent bond may then yield 5%. So your 6% bond will jump in price because it’s more desirable. Eventually, it will rise in price enough to yield 5% – for someone else. Yet you’ll still earn 6% until maturity. Or you could sell the bond for a profit at the elevated price.
Remember, bonds are called fixed income assets. The interest won’t vary; it will stay fixed. If rates drop, you’ll continue to earn the same yield as the day you bought the bond. So today’s bond yields may be even more attractive in a year or two if interest rates decline.
I haven’t seen a better opportunity in the bond market in my 16 years with The Oxford Club. Yields are strong, and if a recession occurs, as many still expect, bonds that are bought today will be big winners, generating lots of income.
Bonds are the perfect Goldilocks investment for today’s market.