Vladislav Reshetnyak

Billion Dollar Mom On Fear and Investment

You may have seen or experienced it. Fear. It can paralyze or fuel behavior that is neither reasonable nor wise.

We’ve witnessed a lot of this recently in the news. Fear fueled Brexit, as demographic analysis notes that those in favor of Brexit lived outside of London and worried about immigration and its impact on their future. Many have worried that fear-mongering has fueled a lot of Donald Trump’s success.

In our personal lives, many don’t leave challenging or abusive relationships because they fear what they don’t know, and rationalize their behavior by reasoning that the person who abuses them really does loves them. They know it’s wrong, but they still don’t or can’t leave, and instead stay with what they know. These types of choices are bred from fear, and cause actions that are not in your best interest and don’t end well.

We can see this mindset showing up in financial markets. In the hope of stimulating slow economies, central banks around the world have lowered interest rates and injected liquidity into banking systems by buying government bonds. Some have even bought corporate bonds, which cause prices to rise and bond yields to fall. The strategy is to lower the rates consumers have to pay to buy a house or car and companies have to pay to buy equipment. This is central banks’ way of effectively putting select goods, services, and the cost needed to borrow for them on sale. “Rates are and will be lower longer” has been the market mantra, and it causes unreasonable behaviors. Government bonds, in particular, trade at historically low yield levels globally.

Short-term and long-term government rates are historically extremely low.

When you buy a government bond, it’s reasonable to expect that you’d earn something on your investment, right? However, about 40% of ALL government bonds around the world are trading with negative yields, and over 70% are trading below 1 %! A negative interest rate means investors are paying the government to invest in their bonds. In other words, if you buy and hold a security until maturity, you will earn the yield rate quoted to you at purchase. Right now, nearly 40% of all government bonds around the world have a NEGATIVE yield, which is neither reasonable nor sustainable. While you might reason that negative sovereign yields result mainly from central banks’ massive government bond buying program, you’d think that other investors would recognize that the trading levels are not historically reasonable and sell them. That is not happening enough to normalize trading levels.

Even more of a head scratcher is that high quality corporations are also trading with negative yields. According to Merrill Lynch, investors own about $512 billion (465 billion euros) of expensive investment-grade bonds with yields below zero, which represents about 24% of the investment grade market.

This move has been driven by the European central banks’ announcement that they were going to be buying corporate securities. Yields are so low that it almost guarantees a loss, yet investors either still buy or own them!

Surely investors know that it’s not logical to continue to own bonds with negative yields. But fear is influencing them. They worry that things might get worse; where else can they invest?

Cash is a better option.

It reminds me of the decision some make to stay in an abusive relationship. Buyers and owners of negative yield corporations are effectively paying the corporation for the opportunity to lend to them, when, naturally, most investor are paid for the money they lend.

Investors will eventually feel the pain. This is not sustainable or sensible.

Therefore, be forewarned. AAA-rated government bonds are often referred to as the “risk free” rate. High quality governments have no credit risk; that is, the government will pay you back. They can print money if necessary. However, government bonds are not RISK free! There are periods of times where they generate negative returns – in some cases -30%. My prediction is we will see negative absolute returns in U.S. bonds in the not-too-distant future. And if we normalize rates resorting to historical norms, you can experience significant losses in your bond investment portfolios. This is what is happening globally.

Take away: Let go of fear, and do what makes sense in life and with your money. Don’t let fear of the unknown keep you from doing what you know is in your best interest. Get out of hurtful relationships. Look at your investment statements; and if you own government bonds, be wary. You are better off alone, just as now with negative yielding bonds, you are better off in cash.

F.E.A.R. Forget Everything and Run, or Face Everything and Rise. The choice is yours.

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