Once upon a time John and Jane Public were terrible at timing the stock market. They sold stocks at the wrong time, bought them back at the wrong time, and ended up doing worse than someone who just owned the overall S&P 500 SPX, +0.17% and forgot about it.
But this year, John and Jane have made a big advance.
No longer are they bad just at timing the stock market. Now they’re bad at timing the bond market, as well.
They poured back into the bond market in May and June, but only after it had recovered from the crash, reports fund-research company Morningstar.
When prices plunged in March, they weren’t buying—they were selling.
“Taxable-bond funds gathered a record $74 billion in May,” says the company. “The group’s previous inflows record was set in January with $61 billion, and it suffered $240 billion of outflows in March.
Dalbar, a financial research company that tracks ordinary investor fund flows, says: “The Average Fixed Income Fund Investor lost -1.49% in the first 4 months of 2020…while the Bloomberg Barclays Aggregate Bond Index gained 4.98% during the same period.”
In other words: Buy high, sell low!
(On the stock market, too, ordinary investors lost out through timing. Dalbar says the average stock fund investor lost 12.5% through the end of April, while the S&P 500 index was down just 9.2%.)
March’s panicked exodus from bonds was so bad investors cashed in 5% of all the money they had in their bond funds, Dalbar reports.
No wonder the bond market, which is usually expected to go up during a crisis, crashed by 9% at the lows.
So ordinary investors, who have been adding to their bondholdings for years as they near retirement, managed to sell during the fire sale.
Whether bond investments being made today will turn out to be profitable remains to be seen. You have to wonder, though, how many investors understand what they are buying. At current prices, benchmark 10 Year Treasury bonds TMUBMUSD10Y, 0.695% are promising an annual yield, or interest rate, of just 0.75%. That’s less than half the annual inflation rate being expected by the Federal Reserve, so these things are highly likely to lose you purchasing power. And the so-called real, inflation-adjusted yield on TIPS bonds for the next 10 years is negative half a percent.
Bonds at these prices may still be good insurance against deflation or collapse, but it’s hard to see how they are going to make anyone rich or even provide a reasonable income in retirement.
If someone needs to buy bonds, Alain Bokobza and the global asset allocation team at SG Securities think there are still reasonable opportunities among corporate bonds. The reasons? Yields haven’t fallen nearly as much as those on Treasurys. Oh, and the Fed is out there buying them and pushing up prices.
So the average yield on BAA-rated corporates—nvestment grade—ight now is about 3.6%, and the average yield on riskier high-yield bonds is just over 6%. There are multiple mutual funds and exchange-traded funds that invest in these bonds on behalf of ordinary investors. Low expenses are especially important when yields are low. In their respective categories, Vanguard Total Corporate Bond fund VTC, +0.12%, which holds only investment grade bonds, charges 0.05% of assets a year. SPDR Portfolio High Yield Bond SPHY, +0.40% ), which invests in riskier bonds, charges 0.15%.
There again, you can also find higher yields on plenty of good quality real-estate investment trusts and other stocks, especially overseas. But that’s another story.
Originally published on MarketWatch