The Dirty Dozen: 12 Genuinely Awful Investments

This, not fees on overnight instead of payment for deposits is what negative interest rates are really about, at least in the context of giving meaningful positive potential return potential to long-term fixed income. So do yourself a favor and tune out the policy wonks who talk about negative interest rates already being here.

Enough of this jiggery-pokey! Can we just get real and recognize that the prices in the fixed income market (which rise as interest rates fall and vice versa) are butting up against an absolute incontrovertible top, a peak, dare I say, a bubble? And this is not like an equity-market peak, which s never absolute and always debatable. In fixed income, there is no debate. It’s absolute.

Turn? Yes! When? Hmm . . .

Here’s the hard part. When will rates rise? In late 2016? In early 2017? That’s hard to say, given the incredible amount of economic and financial dislocation out there (at least partly caused by Central Bankers who kept slashing rates long after it became apparent to normal people that this sort of thing had lost its former power to influence economic activity).

So it’s possible that rather than chart a “U” or “V” shape, interest rates could, after reaching bottom, as they have, move horizontally along the floor for a heck of a long time. Or not. Honestly, I don’t know.

The Suitability Conundrum

OK. So it would not be correct to say there is a 100% probability of loss in long-term fixed income. Its possible principal/asset value could hold constant for a long time while investors continue to collect interest at current nano-rates. It’s also possible that serious traders can make money catching the squiggles inherent in any open market as it reacts to news events and the like: As Jack pointed out in our forum, TLT is up 8 points since I last bashed it (that apparently being buying in reaction to Brexit).

So now, let’s think about the countless folks who are exposed to long-term fixed income. Are they there for the trading opportunity? I seriously doubt it. My 88-year old mother, who received a proposed plan from Vanguard Personal Advisor Services that recommended a 8% stake in long-term U.S. fixed-income definitely isn’t interested in quick-hit trading opportunities. I suspect none of the clients of Schwab, Wealthfront, Betterment, Wise Banyan etc. who have fixed income exposure either through default (long-term allocations in the all-segment bond funds into which they get shoved, or in dedicated long-term fixed income) are looking for the quick-hit trades.

If you’re a skilled trader and you believe you have a bead on TLT or another long-term fund, have at it. For the rest, I think we have to consider something else.

Risk Reduction

As noted, TLT has been a risk-reducer’s dream for Jack and so many others. But that was then. We can’t go back in time. We have to look forward.

Even in the best-case scenario, the performance seen from TLT in Figure 1 is absolutely positively out of the question. Quick-hit squiggles aside, TLT has no choice but to move sideways, with its 2.24% yield, or fall.

As with all investments, there is a range of probable outcomes, which can be summarized by al illustration of a probability distribution, as per Figure 5.

Figure 5

Probability Distribution

Many will recognize that this is a nice clean artistically rendered “normal distribution” with bad and good outcomes (red and green respectively) being equally probable. The further away from the middle we go, the better or worse the potential result. The higher up we go vertically, the higher the level of probability we get a particular result. By definition, the highest probability is associated with the neutral outcome in dead center.

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