09/12/2010 – How a “Dull” Investment Can Be a Great Investment

As I got older and talked with friends about investing, I’d
light up when the topic was stocks. Who in the world couldn’t
get excited about analyzing companies to decide which ones could
make you money! When the conversation turned to bonds, however,
I would shut down. Bonds? How dull; how utterly boring.
There’s no story to tell, no industry trends to follow.
I saw bonds as an interest check every six months, then a return
of principal when they mature. BORING.

Over the past few years, I’ve read article after article
about investors getting out of the stock market in favor of bonds.
I understood the reasons for getting out of the stock market,
but the thought of moving into bonds baffled me. Interest rates
were very low, and I knew that when the rates started going up,
bond prices would go down; a simple inverse relationship. I started
investing in the mid-80s, when rates were at the highest point
of the past 50 years — who would buy bonds now, when yields
are at the lowest levels in half a century? There’s no
place for your principal to go but down, I thought.

So I went back and talked with my friends some more, to see
if there was something I was missing with these “dull investments.”

Turned out, my friends had moved their money into bonds after
they lost over 30% in stocks during 2008. They told me that bonds
had gone up in value. I was astonished.

So I started looking into it. They were right! I thought bond
yields could go no lower than they were two years ago, yet they
did, In turn, that brought the prices — i.e., the principal
on their investment — up!

I asked what kind of bonds they got into. “High-yield
bond funds,” was the answer. What kind of bonds are these
funds invested in? To this question I got blank stares. How long
do you plan on staying in these funds? This got the reply I was
afraid I’d hear: “Why would we get out when they are so
much safer than stocks?” That’s when my new interest in
these once boring investments turned to fear — for my friends.

First of all, the simple idea that a rise in interest rates
would cause their principal to fall worried me. But my greater
fear was that they did not even know what types of bonds they
were invested in!

Elliott Wave International’s president Robert Prechter
has followed this new investment trend closely in his monthly Elliott
Wave Theorist. This quote is from the October 2010 issue:

A fifth consecutive major disaster is developing for investors.
History shows that investors have been attracted like moths
to a flame to four consecutive pyres: the NASDAQ in 2000, real
estate in 2006, the blue chips in 2007 and commodities in 2008.
Now they are flitting across the veranda to a mesmerizing blue
flame: high yield bonds.

Bonds pay high yields when the issuers are in deep trouble
and cannot otherwise attract investment capital. The public
is chasing a large return on capital
without considering return of it.

You
can learn more about what Prechter’s market analysis
says for bond investors now — free. We’ve recently
released a 10-page report, “The Next Major Disaster
Developing for Bond Holders” free to members of
Club EWI.

Discover why Prechter says that, “The public always
does the wrong thing.” Follow
this link to access this free online report right now.