Thursday, March 24, 2011

The Next Investment Bubble

by Expat Focus financial services partner, Tom Zachystal

Over the last four years retail investors have largely put their money into bonds and, to a lesser extent, non-US stocks. Money flows into US equity mutual funds have been negative each year in the last four. This trend has been especially prevalent in the last two years, even as equity markets outperformed bond markets.

Just recently we have seen a cross-over; with investors selling bond funds and money starting to flow into equity funds – especially US equity funds.

We should ask whether we are not seeing the initial stages of the bursting of a bond bubble. I think this may well be the case - at a minimum it seems there should be a re-balancing toward stocks.

The case for fixed income investment has to do largely with demographics and fear. As the general population ages it is natural that investors put more money into more conservative income-producing investments. Also, there is still considerable trepidation amongst investors who lived through the equity downturn of 2008. Furthermore, whenever there is political or economic uncertainty, investors still run to US Treasuries.

However, the cards seem stacked against bonds. At a minimum, we might expect there to be a re-balancing at some point as investors diversify their bond holdings into other asset classes. But there is more to consider:

· Interest rates are very low in most developed economies, and surely must rise at some point - a negative for bond prices.

· Sovereign debt has increased dramatically in the US and many European countries - this could lead to credit downgrades or even defaults.

· Many US States and municipalities are also having difficulty meeting their debt burden requirements - bad news for municipal bonds.

In my opinion, the risks outweigh the benefits with respect to bond investment at this time. This view is also shared by the vast majority of professional investment managers whom I have heard speak at the various 2011 forecast events. The world’s largest bond fund management company, PIMCO, has recently diversified its business to stock funds and its Chief Investment Officer, Bill Gross, has commented that the best years for bonds seem to be over. Just recently the Financial Times and Wall Street Journal published articles stating that PIMCO had sold all it’s US Treasuries.

It is important to understand why bonds and bond funds are at risk in a rising interest rate environment and which investments are most at risk...


This article is for informational purposes only, it is not intended to offer advice or guidance on legal, tax, or investment matters. Such advice can be given only with full understanding of a person’s specific situation.

Tom Zachystal is a U.S. Registered Investment Advisor, Chartered Financial Analyst, and Certified Financial Planner™ professional with over ten years expatriate portfolio management and financial planning experience. He has clients on four continents in over a dozen countries and is one of the original members of the Expat Focus Trusted Partner Network, a small group of financial advisors selected specifically for their professionalism and integrity. His services include: US or offshore investment accounts, IRAs, 401ks, portfolio/investment management, UK SIPPs, UK pension transfer to the US or elsewhere (QROPS), retirement planning and other financial planning services for US citizens living abroad or residents of any nationality living in the US.

Click here to send Tom a no-obligation enquiry for financial advice.

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