During the past week, a survey caught my eye and dropped my jaw. It was published in Investment News, a leading online and print publication for the investment advisory industry last weekend. It covered a survey of individual investors by brokerage firm Edward Jones about the potential impact of rising interest rates on their investment portfolios. According to the article, written by award-winning columnist Jeff Benjamin, “two-thirds of the respondents don’t understand how rising rates will affect their investment portfolios.”
That is an astounding number! In other words, after 32 years of falling interest rates, much of the investment public is unaware that when rates rise instead of fall, they can lose money in bonds and bond funds. It follows that if rates rise a lot (from today’s Fed-suppressed low levels), investors in bonds and bond funds may lose a lot of money. This is merely one piece of a larger slug of evidence that today’s investor, having never experienced rising rates for any sustained period of time, is completely unprepared for what is a most realistic possibility — a major trend change in bond investing. It is not that investors are dumb or mis-informed. They have just never been informed! And it appears from the many advisors quoted in the article that they may not be informed any time soon.
As I see it, the reaction of several of the advisors ranged primarily from overconfidence to indifference. That is, it was somewhere between “don’t worry, valued client, I’ve got this one” and “yeah, yeah, the bond market thing…whatever.” From my many discussions with advisors over the past decade, I must say this does appear to be a microcosm of the general feeling out there.
Once or twice a year, I read something about my industry that causes me to scream out loud…kind of like an LOL (laugh out loud)…only not funny at all. This was my first of 2013. The result was a very enjoyable discussion with and invitation from the aforementioned Mr. Benjamin to be featured in his “Take Five” column. To see my explanation (rant?) on this most critical subject at a critical time for investors AND their advisors, please click on this link. And let us know what YOU think.
© Sungarden Investment Management
