The Bond Inferiority

Karen's financial advisor keeps telling her to invest her 401k and IRA money in bonds. Dave tells her why she's right to stay away from it.

QUESTION: Karen and her husband retired 4 years ago and rolled their 401k to an IRA. They kept it conservative, but then the company changed it to all bonds. They then moved it up a little, and their advisor wants them to move back to all bonds. They have never done well with bonds and want to know Dave’s advice.

ANSWER: You are thinking for yourself and I agree with your views. This is a bad time to get into the bond market. We are taught that bonds are more conservative than stocks. Generally speaking, bond rates haven’t been as volatile as the stock market, until the whole Fannie Mae, Lehman Brothers and Bear Stearns deal. The bond market has just gone completely bananas. You smell something bad here, and there is something bad here.

The second problem here is that when interest rates go up, bond prices go down, and interest rates are very low right now, so they will go up from here, which will make your bonds go down. That goes against the general thought that your financial planning firm is coming from, which is that bonds are safer.

You have a good gut feeling, so go with that. Try to find someone here who will teach you instead of trying to sell you. If a financial advisor acts like they are smarter than you and you should do something just because they say, then fire them. Get an advisor who has the heart of a teacher, not the heart of a salesman. I personally think it’s a very bad time to be in bonds. Get in good growth-stock mutual funds.