Inflation hawks, be careful.
A sudden surge above the Federal Reserve’s 2% target could hurt the bond and stock markets, Charles Ellis, author of the legendary investment book Winning the Loser’s Game, said on CNBC’s ETF Edge this week.
“The cost of money is so low that bonds pay nothing after adjusting for inflation,” said Ellis, founder and former managing partner of Greenwich Associates.
“If bonds are a bad bet because of inflation, then inflation will affect stocks too and will undoubtedly decrease the value of stocks,” he said.
Bonds are Ellis’ latest allure, a new chapter in the eighth issue of Winning the Loser’s Game, released Tuesday.
According to him, the traditional bias towards 60-40 reverse convertibles is out of date, with investor individualism taking precedence.
Every investor has “different wealth, income, savings capacity, and attitude to risk,” said Ellis.
“If you take all of these different things and a different time horizon … that should determine your way of investing,” he said.
For example, having 30-40% of your portfolio in bonds as someone who is able to save a considerable amount of money might be wrong, Ellis said.
“There may be someone in the world for whom this is the right answer, but there are not very many and they certainly are not all,” he said.
With interest rates so low, ETF investors in particular should be careful with bonds, said Dave Nadig, chief investment officer and research director of ETF Trends, in the same “ETF Edge” interview.
“Bonds in a portfolio have always behaved differently than individual bonds,” he said. “In a portfolio of bonds that are constantly being rebalanced, that’s a very different return pattern.”
For Nadig, part of the problem is that bond investors are not getting paid well enough for the risk they are taking.
“There are several things that make bonds a very difficult asset class,” he said. “That doesn’t mean that a single bond still can’t serve a specific purpose for someone. I know a lot of consultants who still build individual bond heads for specific clients with specific needs. But the blanket idea that you as an asset class can make money stuck in the AGG and it will do a certain thing for you. I just don’t think it’s true right now. “
AGG is the iShares Core US Aggregate Bond ETF, which is just over 4% below its all-time high from last August.
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