Are Bonds Bad? How About Funds? Financial Advisors' Daily Digest

by: SA Gil Weinreich

Summary

Evan Powers shows the hazards of scary headlines and imprecise investment analysis.

Jeff Miller’s Stock Exchange favors skill over luck in investing strategy.

Aristofanis Papadatos weights luck over skill in investing strategy.

A finance professor friend once remarked to me how absurd was all the media discussion of "annuities." As a serious scholar, he understood that one has to define terms precisely. Discussing, usually condemning, "annuities" was as meaningful as condemning "funds." Funds are bad. Funds are a rip-off. Don't include them in your portfolio! But of course, most of us own and see the advantages of some funds, as well as the disadvantages of other funds.

This came back to me as I read "Is it really 10 times riskier to retire now than a decade ago?" by Evan Powers on today's SA. Evan takes issue with an analysis he read in Kiplinger that commits the same error of imprecision regarding interest rates and rates of return for fixed income. Read the whole article for the details, but in a nutshell, Evan argues that the author is coming to a quite extreme conclusion about the need to dial up risk to achieve one's retirement goals largely on the basis of the poor expected returns of "bonds." In other words, you must own stocks because "bonds" are bad and cannot possibly play a role in your retirement portfolio, given today's low rates which are presumed to remain low in perpetuity.

But, Evan points out, there are all kinds of bonds. There are 7-10 year Treasuries, intermediate-term corporates and high yield bonds - to name just three categories of many. He writes:

In 3 of the last 5 years, the spread between the 'worst-performing' and the 'best-performing' bond sector has been greater than 10%, which is a whopping difference."

You can learn a good deal more about "bonds" and interest rates in Evan's article, but the most important takeaway may be to bring a healthy dose of skepticism with you when consuming financial (or any) media - and beware of scary headlines.

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