Youâre receiving this email as part of your subscription to Andrew Zatlinâs Moneyball Daily [Unsubscribe]( [Moneyball Economics] Andrew Zatlin here with a brand-new issue of Moneyball Economics. You know, a funny thing happens when interest rates rise: Your bonds get crushed! So in my latest video, Iâll explain why a certain piece of your financial future could be in for a rough ride⦠And Iâll tell you what to do right now to ensure smoother sailing. [CLICK HERE TO LAUNCH VIDEO OR READ THE FULL TRANSCRIPT BELOW »»]( Get Out of Bonds... Now! Hi, I'm Andrew Zatlin⦠And welcome back to Moneyball Economics! As I mentioned last episode, Iâll be sharing some 2022 investment themes with you. The very first one? Interest rates! A Dark, Dirty Secret To kick things off, letâs talk about how to ârate-proofâ your portfolio. OK, so Iâm going to let you in on a dark, dirty secret⦠It has to do with the financial advisory business. And make no mistake, it is a business. I want to break this secret into two parts:
- The first part involves how to ârate-proofâ your portfolio. Thatâs what weâll cover today.
- And the second part relates to this thought: When you're at such a big inflection point â where you need to make major changes to your portfolio because rates are about to move â you want to find out if your financial advisor is actually advising. In other words, are they actively working in your best interests? And guess what? Odds are, they aren't. Donât worry. I'm going to explain everything â because there are some deep, dark, dirty secrets to share. First, though, let's talk about interest rates⦠Up We Go Interest rates are going up. And hereâs whatâs important to know: When interest rates go up, that's really, really, really bad for bonds! It's not necessarily good or bad for the stock market, although certainly it can be bad. But it tends to be a situation where there are winners and losers. But if youâre a bond holder, that'll mean taking the fast train to âpain city.â Hereâs what I mean⦠Welcome to âPain Cityâ In case you're not clear about this⦠Bond prices and yields move inversely. They move in the opposite direction. I wonât bog you down with all the mechanics of why... but this is a fact. So when interest rates go up, the value of bonds goes down. For example, if youâve got $1 million worth of bonds right now, guess what? If interest rates go up, those bonds are soon going to be worth, say, $950,000. In short, youâre going to be losing a lot of money if you sit on bonds. To demonstrate this point, let me share something with you⦠The Barclays Agg This is called the Barclays Agg, short for âBarclays Aggregate.â This is the premier benchmark for all bonds. It lets us know what's happening in the bond market. There's a lot of opportunity here for complexity, because there are many different types of bonds: Two-year bonds, three-year bonds, 10-year bonds, 30-year bonds â all different âflavors.â And people will argue about what's happening with the overall bond market based on only one of them. But that's like arguing about the status of the overall car market because [Zatlin mocking tone] âSUVs might be moving a certain way.â Hey, you know what? Anyone who creates complexity is trying to confuse you. Theyâre not shooting straight. Instead, just look at this chart â it gives you a simple view of what's really going on. Recent History There are four times in the past five years where we've seen an inflection point in interest rates. Let's start off with the very first one in 2016. That was an election year. But it was also a very recessionary time. The economy was not doing well. But then President Trump comes in. And whatâs he do? Boom! A tax cut right off the bat in 2017. And the economy takes off amazingly! So The Fed comes in in late 2017. And what do they do? They raise interest rates! The next thing you know, the Barclays Agg â basically the aggregate view of what's going on with bond prices â goes down 5%. And to be honest, it was already drifting down prior to the rate hike because everybody knew that rates were going to move. And as Iâll explain in a minute, everyone knowing is a key part of what you want to pay attention to... No More Rate Hikes In any case, 2017 is a great year, everything's going great⦠Until we get to late 2018. Thatâs when The Fed starts talking about âno more rate hikes.â And then you start to see bonds going up. Why? Well, because if there are no rate hikes, then eventually thereâs going to be rate cuts â and bond prices will move up. Sure enough, the Agg starts drifting up from about 98 (as shown on the chart), and then it moves up really fast. Hereâs why: The Fed is no longer talking. Itâs acting. Pretty much from late 2019 on, The Fed cuts interest rates almost a full point. And the Agg has since moved up 10%. So what do we know so far? As soon as The Fed starts signaling rate hikes, bond prices start to sputter⦠And as soon as they actually make the rate cuts, bond prices go down! But keep in mind, the opposite is also true: As soon as The Fed starts to signal that itâs going to get a little loose (i.e., that itâs thinking about lowering rates), bond prices start to go up. And as soon as they pull the trigger (in other words, they actually lower rates), bond prices really go up. Fast Forward So, fast forward to 2020. Sure enough, The Fedâs been talking all year â starting in late 2020 and into 2021 â about looking at raising interest rates. Well, obviously, theyâre going to raise â because we were at 0%, so the next step would be a hike! And what do we see? Well, we see about a 3% drop in the Agg. We're basically repeating where we were in 2016, going into 2017, where we expected rates to go up. And what did we see? Bond prices went down! The âKiss of Deathâ So if youâre an investor right now, why would you be invested in bonds?!? Look at these inflection points on the chart... They carry over for a couple of years. It takes a while for these things to play out. So this isn't a short-term, âget in, get outâ move. It's just logic. It's just simple logic! Interest rates are going up⦠And that is the âkiss of deathâ for bonds. Bottom line? Get out of bonds! Get Out Now! Seriously, Iâm not sure why weâre still talking here⦠Pick up the phone, call your advisor, and get out of bonds! The last time we were at an inflection point like this was in 2008⦠There was a big recession and rates were cut. The Agg went up 16% â it was a great time to be in bonds! But look where we are now: Rates are going up. It's like 2016 all over again! When rates rose 2 ¼ percent over that period â 2016 to 2018 â the Agg fell 7%. Simply put, there are no positives for the bond market right now. So youâve got to ask your advisor right now: Why am I still in bonds?!? In my next article, Iâm going to talk about how to work with your investment advisor⦠I want to make sure theyâre on your team â and not just working for themselves! For now, Zatlin out. Talk to you soon! In it to win it, [Andrew Zatlin] Andrew Zatlin
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