Monday, January 7, 2013

I Actually Agree With Goldman Sachs

Why Goldman Thinks You Should Dump Bonds Now

Goldman Sachs has issued a warning to their clients to get out of bond funds.  I actually agree with them, however, not for the same reason.

Goldman is predicting that interest rates will increase:

"A reversion of risk premiums to historical averages of 6% nominal rates (3% real rates and 3% inflation) would suggest estimated losses in portfolios with bond durations of 5 years of 25% or more," equity strategist Robert D. Boroujerdi said in a note."
Maybe they are right, maybe they are wrong, at some point interest rates will probably increase for a number of reasons:

1. They are real low now and don't have a lot lower they can go
2. A lot of bond buying has been flight to safety, at some point things will improve globally and that money will probably shift to equities.
3. The Fed is keeping them low, they can't do that forever

However, who knows when this will be, that is what makes investment decisions based on predictions so hard. 

The real reason that investors should get out of bonds and into stocks instead should be based on market trends.  Momentum and relative strength cleary favor stocks right now, as long as that is the case being in stocks offers a better risk/reward than bonds.  That doesn't mean stocks will continue to rise from here, it just means that the odds of that happening are in your favor.  When/if that changes investors will be better off in bonds. 

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