This is the big blunder that many average investors are committing now
Many average investors are committing a blunder now.
It’s not all their fault, though, as information is often dumbed down in the interest of simplicity. As Einstein said: “Everything should be made as simple as possible but not simpler.”
Unfortunately, often the information provided to average investors has been simplified below the bare minimum. To avoid the blunder, average investors need a bit of sophistication.
To fully understand how to avoid the blunder, let us first start with a chart that illustrates the point. Read on for the blunder and how to avoid it.
Chart
Please click here for the chart of iShares 20+ Year Treasury Bond ETF TLT, -0.11%Please observe the following important points on the chart:
• The chart shows that TLT has fallen about 18% from its recent peak.
• An average investor who bought near the peak to collect about 2.75% interest has now lost about 18% of the principal.
• If interest rates normalize even to the recent low levels, an average investor who bought near the peak will lose 42% of the principal.
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Read: If you’re freaking out about the stock market, remember why you invested in the first place
The myth
Many average investors believe the myth that bonds are safe. There is some truth to the understanding that bonds are safer than stocks, but average investors miss an important nuance. If you buy an individual Treasury bond or a bond of a company with a solid balance sheet and hold it to maturity, you will get your principal back. However, this is not the case when you buy mutual funds or ETFs.
60/40 problem
Many average investors are advised to start with 60% in stocks and 40% in bonds. Of course, adjustments are made based on age and objectives. Investors are told that stocks are for growth and bonds are for safety and income. Many average investors do not understand that they can lose a lot of money in bonds.
30-year bull market
Bonds have been in a 30-year bull market. For this reason, the bad advice given to investors has not hurt them so far. However, average investors need to know that the bull market has ended.
The blunder
As stock market volatility has risen, many average investors who want safety are moving out of stocks into bonds. They are doing so because they do not understand the following:
• They can lose money in bonds, as illustrated in the chart linked above.
• Interest rates are rising.
• Bonds move inverse to interest rates. In plain English, when interest rates go higher, bonds go lower.
• Stocks are experiencing volatility because of rising interest rates.
What to do now
First and foremost, do not buy bond funds or ETFs.
Second, understand that most funds and popular ETFs are concentrated in a handful of stocks that have run up and now pose a high risk. For example, the top holdings of popular ETF SPY, +1.21% are Apple AAPL, +0.73% Microsoft MSFT, +1.75% and Facebook FB, +0.97% Alphabet GOOG, +0.60% GOOGL, +1.01% is right there too.
These are also the top holdings of popular ETF QQQ, +1.08% along with NvidiaNVDA, +9.62% Netflix NFLX, -5.47% and Qualcomm QCOM, -4.03%
The point is that many investors are overly concentrated in technology stocks.
To be helpful, the following articles are provided to you for the information, understanding and action items for current market conditions.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. All recommended positions are reviewed daily at The Arora Report.
Nigam Arora is an investor, engineer and nuclear physicist by background, has founded two Inc. 500 fastest-growing companies, is the developer of the adaptive ZYX Global Multi Asset Allocation Model and the ZYX Change Method to profit from change in trading and investing. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at [email protected].
[“Source-marketwatch”]