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Warren Buffett and the Bond Market


On, Monday, May 6th, during an interview on CNBC, Warren Buffett, the venerated Chairman of Berkshire Hathaway and famous investor, called the fixed income or bond asset class a "…terrible investment right now".  Obviously, it is important to listen closely to what Mr. Buffett has to say given his investment track record.  However, it is also important to take several other factors into consideration as well, such as:

1.) Mr. Buffett is in a different financial position than probably 99% of us and, therefore, can afford to take a different amount of risk.  This is also likely true for most of the people who earn a living by making financial predictions.

2.) As The Wall Street Journal wrote on Sunday, bond bears were making the same calls in the beginning of 2010, 2011, and 2012; those predictions led to lower yields (e.g., higher bond prices and thus higher bond returns) as the year went on.  If the keep predicting this every year I guess eventually they will get it right.

3.) While bonds may be a "terrible investment right now,” according to Mr. Buffett, that shouldn't mean that if you currently own bonds you should get rid of them at this time because, when the stock market pulls back, and it will, you will be glad you owned bonds.

4.) A "terrible" market for bonds is much better than a "terrible" market for stocks.  One of the worst bond markets occurred in 1994 when the Federal Reserve raised the funds rate from 3.00% in January 1994 to 6.00% in 1995 in quarter percentage rate increments and the bond "market" as measured by the Barclays Aggregate index lost 2.9% where the stock market, as measured by the S&P500, gained 1% in 1994 but lost 9% in 2000, 12% in 2001, 22% in 2002 and 37% in 2008  (Sources:  http://www.bonddeskgroup.com/main/market-data/historical-returns/bond-vs-equity-returns , http://www.ritholtz.com/blog/2011/04/is-it-1994-again/ )

5.) All of Mr. Buffett's investments and predictions, as well as those of most financial market predictors, have not always been correct or made money.  In 2009 his company lost 62% due to their investment portfolio (Source: http://www.cbsnews.com/2100-500395_162-4835570.html )

6.) In our opinion instead of trying to guess what the financial markets are going to do, which we cannot control, it is more important to look at your investment portfolio with respect to your goals and the amount of risk you are willing to take and to not to have all your "eggs" in too few baskets.  This is what we help our clients do.




*Please note that it is not possible to invest directly into an index.

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