Risky Business and the Bond Bubble Paradox
Top 5 of the Week of July 4
In this week’s Top 5, Kim Iskyan of The Street steers us through the choppy waters of investing in the world’s riskiest markets. David A. Levine from the New York Times, suggests we should all think like Goldilocks when it comes to investing for retirement. And The Motley Fool’s Knowledge Centre guides us through what investors need to know about emerging market funds.
Given the recent volatility in the market, it’s hard not to react, but Ben Carson, of A Wealth of Common Sense, questions those who seem to be heavily turning to bonds at this time. And Carl Richards, author of Behavior Gap, believes investors fall into two groups: those that look at five days in the market or five years, which type are you?
Risky Markets, Risky Business?
- “Country risk premiums” (CRPs) are the enticement for investing in risky countries because as with any equity investment, higher risk implies higher gain—but also potentially bigger losses
- Investors analyze many country specific traits to calculate CRPs; such as bond yields (and spreads), volatility, inflation, as well as any legal, political, and economic factors
- Risk assessment isn’t a very accurate tool so only proceed if the investment becomes part of a balanced, diversified portfolio
Bonds that are “Just Right”
- Appropriate insurance will provide a better cushion than large sums of cash parked in low-interest accounts or funds that won’t grow at the same rate as the rising cost of living
- Invest in stocks to accumulate wealth and look for that “sweet spot” for your fixed-income assets: not too long and not too short term
- Intermediate-term bonds—over a long time—will provide you with an inflation-adjusted retirement income rather than just cash assets which will disappear once you start spending them
Emerging Markets Promise Potential Profits
- Emerging markets are countries that haven’t yet developed a market to the size like those of the US, UK, and other European countries
- Major emerging markets include Brazil, Russia, India, China, Taiwan, Mexico, Indonesia, and South Africa; those with good demographic trends and high economic growth rate prospects
- Invest in these via an Emerging Market Fund or ETFs to gain from the benefit of investing in thousands of stocks while mitigating the risk of being exposed to higher volatility and less regulated markets
The Bond Bubble Paradox
- Bubbles in markets occur by investors jumping on a stock bandwagon due to high yields by others, but bond rates continue to fall though some say they’ve been in a bubble for 4-5 yrs now
- Despite the Treasury yield at a record low of 1.3%, it seems investors are still turning to bonds because they are concerned for safety in such unstable market times
- More uncertainty lies in the long-term effects of low-interest rates in the future, as this has never happened before in financial history
5 Years or 5 Days?
- If you want to take a serious long-term strategy when it comes to investing you need to alter your way of thinking
- Ignore ‘breaking news,’ this type of short-termism will only make you panic at times of market volatility
- Diversify your portfolio and stay the course: choose to watch five years rather than five days for real results
Are you a five days or five years investor? Can you keep your cool in times of market volatility? Let’s start a discussion in the comments section below
Top 5 of the Week is a summarized collection of financial investment articles that we like and think you might like too. Having written thousands of pages of equity strategy and company research between us, we understand the allure of the ever-changing world of finance. Investing is an art form – and like everything, something you can work on and improve at. There are some excellent writers out there on the finance web, some offer a running commentary on today’s market, some are doing research, some have tips on how to Become a Better Investor, and some just lift the cloud of fog behind a lot of financial jargon. Each week we will keep you up to date with the top 5 articles worthy of your attention.
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