Are you holding onto bonds? You may want to jump on the bandwagon and start selling them.
TrimTabs reports that investors are fleeing from bonds at an alarming rate because of the rising yields. Bond yields are correlated with the demand for money, so when production goes up, bond yields often increase too.
That’s not the case this time. Now, it’s a matter of fear. Investors are worried about the bond market because it seems as though the Fed isn’t able to stabilize it and will begin to pull money from it in large amounts – by tapering stimulus.
To what extent are investors bidding farewell to their bonds? $19.7 billion has exited bond mutual funds and ETFs in August alone, and that’s on top of the $14.8 billion lost in July. Since June, there has been a total loss of $103.5 billion in bonds. Yikes.
Investors are not playing games with the volatile bond market. They are taking action now versus playing the “wait and see” game.
The Real Reason Bond Investors are Hitting the Road
The reason investors are quickly getting out of the bond market is the anticipation of stimulus tapering. The recent improvements in the U.S. economy have many analysts claiming the Fed could begin reducing its $85 billion in bond purchases as soon as September. Considering the Fed’s September meeting is just under a month away – and the Dow Jones experienced the slump of the year just last week – investors are nervous.
Instead of waiting to see what the Fed will do and how that will affect the bond market, investors want to pull their bonds before they lose the returns they have already seen. The bond market could plummet quickly upon the Fed’s decision, and that could leave many investors stuck in the devastation.
Investing After Bonds
No one blames you for wanting to pull out of the bond market. It’s not looking good right now considering the high yields and even higher outflows. But after pulling out a large percentage of your investment portfolio from the bond market, what will you do with the extra funding? How will you recoup the returns you wished you received from your bonds?
Even though bonds may not be an option for you, stocks can still be viable – as long as you do your research. It’s best that you diversify your portfolio as much as possible for the highest gains.
With stocks, you can choose between large and small caps in the United States. For foreign stocks, stick with large established companies.
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Alternative investments are also hot right now, and you might as well play off the improvement of the U.S. economy. Investing in the housing market is a good idea right now because of the low interest rates and still-low home prices. These figures are expected to continue rising into next year, but affordable supply is starting to dwindle, so you might as well get in now.
If you haven’t dabbled in precious metals yet, start now. Gold and silver regaining popularity, with demand rising throughout the world. You can invest in bullion, stocks, or futures, which will all likely produce a satisfying return in the coming year and beyond.
Foreign currencies can be another good investment, particularly China’s yuan. It’s also moving closer to becoming a freely traded currency, rising 30% by 2015 to become the world’s third largest trade currency, as the Wall Street Journal reports. No matter where it ends up, it’s likely the yuan will be going up.
So as you sweat over the future of the bond market, understand that there are many other options for investments. And you don’t have to say goodbye to bonds forever. Just wait it out, and return to it when all of the volatility has calmed down. It won’t be too long.
Once the Fed decides what it wants to do – particularly following the September Fed meeting on the 17th and 18th – the market will shake, and then it will start to adjust just the way it should to benefit investors again.
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