“Don’t want to be an American idiot
Don’t want a nation under the new media
And can you hear the sound of hysteria?”
Green Day “American Idiot”
Investing has always been a process that included controlling your emotions. When you have them under control not only do you tend to make better decisions, they also tend to be much more profitable. Investors love the chorus of “buy low and sell high” but when emotions take over, the reverse is generally what happens. Its always hard to buy at the bottom, if it was so easy then we’d be a nation of very successful investors but the undisciplined investor is far from successful.
Consider the plight of the investor who took his lumps in the crash of 2008 only to give up on equities and turn to bonds as a means to sooth their nerves. Bonds could never be considered an option as the primary means of replacing what was lost in ’08 but the consistent drumbeat of downbeat news bordering on the hysterical and unfounded has been consistent in both the conservative and liberal media.
Despite the extremely strong run in equities since the Spring of ’09 investors have continually been pulling out of Domestic Equity funds and their primary landing spot has been bond funds. Investors (likely based on the media) continue to believe that the another crash is just around the corner. Just last week on Fox a commentator strongly suggested that the market would crash again should the tax extensions not be granted by Congress. Last week individual investors pulled out $1.8 billion from domestic equity funds bringing total net 2010 redemptions to $81 billion, despite equity returns being resoundingly double digit for many classes! In contrast, taxable bond fund deposits have totaled $245 billion despite Treasury yields at rock bottom.
Its been our belief for months that the 30 year bull market in bonds was peaking and that a new bear market in bonds would commence, it appears we were on target. Pity the poor investor who was persuaded by the hysteria this summer to buy bonds only to see close to three years of yield evaporate.
We completely understand that investors are concerned with potential losses but solutions to losses should not come at the expense of return. Hence, the RMHI Hedging feature which we’ll be writing about at length shortly.
Be Careful Out There
Brad