This is not restricted to US or India, it is a world wide phenomenon, but let us take a hypothetical case of a nice honest, hardworking lower – middle class American.
He started life long ago and lived in the usual American style. Let us say he took a huge mortgage and bought a big nice house for himself, his wife and his 3 kids.
Kids grew up, got educated, are not able to get a job. Did you know that for the job of an Air hostess, there were 100,000 applicants in an American airline? There were 1000 vacancies. Applicants included lawyers, doctors, graduates, etc.
So the educated kids are finding it difficult to find a job. His house has gone down in value and his wife has lost her job.
Children who have completed their education AND NOT FINDING jobs are asking Dad for support.
His portfolio in equities has been performing so badly that he has not seen he impact of ‘Dollar Cost Averaging’.
Real estate, gold and equities are a no no for him. He has burnt his hands in all 3 asset classes. Goddamn asset allocation was on leave?
Now that he had burnt his hands in equity and real estate, he turned to the ‘safest’ asset class viz., Gilt – the American Government’s debt.
Fantastic, over the past 3 years, HE HAS GOT A NEGATIVE REAL RETURN. In fact his banker is asking him to invest more money in Gilt mutual funds.
Good idea? No. Not at all. When inflation is about 5%p.a. keeping his money in Gilt at 1.5% MAKES NO SENSE. When interest rates go up – it is not whether, it is SURELY going to reduce the value of his bonds…
With today’s low Treasury rates (giving a NEGATIVE RETURN already) , Bernstein says bond investors are looking at “an extreme low return/high risk proposition.”
One of the hardest things in investing is making a reasonable, disciplined decision and then being wrong for years after, says Bernstein. “Such was the case for sane equity investors in the ’90s, who watched in horror as their uninformed neighbors got rich — temporarily — in tech stocks, while they sat in fuddy-duddy value stocks or cash or bonds,” he says. “I think we’re in a similar period now with bonds.”
Bond interest rates are bound to go up…:-)
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