Many average investors are committing a blunder now.
It’s not all their fault, though, as information is often dumbed down in the interest of simplicity. As Einstein said: “Everything should be made as simple as possible but not simpler.”
Unfortunately, often the information provided to average investors has been simplified below the bare minimum. To avoid the blunder, average investors need a bit of sophistication.
To fully understand how to avoid the blunder, let us first start with a chart that illustrates the point. Read on for the blunder and how to avoid it.
Chart
Please click here for the chart of iShares 20+ Year Treasury Bond ETF TLT. Please observe the following important points on the chart:
• The chart shows that TLT has fallen about 18% from its recent peak.
• An average investor who bought near the peak to collect about 2.75% interest has now lost about 18% of the principal.
• If interest rates normalize even to the recent low levels, an average investor who bought near the peak will lose 42% of the principal.
The myth
Many average investors believe the myth that bonds are safe. There is some truth to the understanding that bonds are safer than stocks, but average investors miss an important nuance. If you buy an individual Treasury bond or a bond of a company with a solid balance sheet and hold it to maturity, you will get your principal back. However, this is not the case when you buy mutual funds or ETFs…Read more at MarketWatch.
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