Massive Bond Bets Are Killing Investor Returns

A massive shift in investor portfolios happened at the worst possible time...

Money-market funds became a "hot" investment earlier this year. Folks woke up and realized they could earn a 5% yield with no risk. So they poured trillions of dollars – yes, trillions – into these funds.

The same thing happened in certain bond funds. In fact, investors poured money into one of the largest bond funds at an unprecedented rate.

This might look like a smart bet after bonds crashed – and rates soared – in 2022. Heck, earning safe yields in bonds may seem like a no-brainer today.

But these folks are playing a dangerous game. It's not because they could lose money... It's because history shows that getting defensive at a time like this is the wrong move.

Let me explain...

Last year was uniquely painful for investors... And it wasn't just because stocks took it on the chin. It was because bonds – which are supposed to zig when stocks zag – fell nearly as hard.

Even if you had a balanced portfolio of stocks and bonds, you couldn't shield yourself from losses. Just about every asset lost a good chunk of its value.

Investors made some poor choices as a result. For instance, many folks realized they could earn solid yields in risk-free money-market funds and in bonds.

Investors hadn't seen an opportunity like that for most of the previous 15 years... So they started buying into these safe assets in droves.

We can see this in one of the largest bond funds, the iShares 20+ Year Treasury Bond Fund (TLT). This fund holds a basket of long-term Treasury bonds, paying a 4% yield. And it has more than $40 billion in assets right now.

The fund's shares outstanding rise and fall based on investor demand. Today, they've skyrocketed roughly 300% since the start of 2022. Take a look...

This is a crazy surge in demand. Seeing this, you might think Treasury bonds have become a crowded trade and that a decline could be on the horizon – and that's a good assumption. But even if that doesn't happen, bad news awaits these investors right now...

You see, when folks are buying a lot more bonds than usual, it means they're selling something else in a big way. And most likely, that "something else" is stocks.

Folks are selling "risky" stocks to buy "safe" bonds. This strategy might seem logical if you're worried a crash is coming. But if you used it at the start of 2023, it has cost you dearly by now...

The S&P 500 Index is up 18% this year. And the Nasdaq 100 Index is up 41%. Meanwhile, shares of TLT are down about 1%. So anyone who moved to safety at the beginning of the year has paid the price.

Clearly, lots of folks made that bet. And if that's you, it's OK. That's because there's still time to right the ship...

I've written many DailyWealth articles in recent weeks that point to higher stock prices ahead. And it's why I believe you want to stay bullish right now. So if you fell into the trap of exchanging "risky" stocks for "safe" bonds, all you have to do today is reverse course.

It might not feel great. But as always, there's no better time than today to fix a mistake... After all, you don't want to miss out on the next move higher in the stock market.

Good investing,

Brett Eversole

Further Reading

Stocks have been on a tear in 2023 – and they still have room to run. Check out some of our recent bullish articles here...

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