Why Traditional "Safe" Investing No Longer Is Safe - Mike Swanson (03/09/2015)

Here are a few paragraphs from an article in today's WSJ titled How To Prepare for a Bear Market.

This is good advice - generally speaking...

And I normally would agree with it, but there is one giant problem.

Here is the excerpt:

If this is true, how can people be prepared for a bear market?

Money managers offer one solution: Give them the money, pay a yearly fee and let them worry.

For those who don’t like that solution, there is an alternative: Weatherproof your portfolio. By diversifying broadly, with enough stocks to ensure gains in good years and enough bonds to limit losses in bad ones, investors can create a portfolio that can withstand bull and bear markets alike. Then they should stop trading.

“Buy an all-market U.S.-stock index fund and a really broad-based international fund and a broad-based bond fund, to keep fees really low,” Prof. Odean recommends. High front-end charges and annual fees charged by some funds and money managers can hinder annual gains, he notes.

People need to try to figure out their real risk tolerances, he says, and mix their stocks, bonds and cash to match those. Then rebalance the mix annually, so it stays steady. Some people do that by changing new purchases or rebalancing nontaxable retirement accounts, to avoid capital gains in taxable accounts.

For full article go here.

The problem is simple. People rely on bonds as a "safe haven" because bonds typically go up when the stock market has a bear market.

So a typical investment allocation is 60% stocks and 40% bonds.

However, right now bonds are a bubble, because they yield absolutely nothing.

So we may easily see bonds go into a bear market along with the US stock market.

That would be a total disaster for most US stock market investors - even ones who think they are being safe and cautious.

Gold would of course rise in such an environment.

But most people would completely destroy themselves holding on to their "safe" investment allocation.

This is the risk that the Federal Reserve has created and it is in a way a much more dangerous potential market environment for people than the 2000 bear or even 2008 crash were as a result.


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