Just when you’ve finally gotten over the stock market crash from four years ago, there’s a new threat that could potentially hit your portfolio. Even worse, it’s in an area that many people think of as being safer than stocks: the bond market.
Goldman Sachs (GS) is the latest big Wall Street institution to sound the alarm about a potential bond market crash. Although bond-market dynamics are sophisticated and complex, the argument against bonds boils down to these simple points: Even worse, many investors who’ve been trying to boost the income from their portfolios have unknowingly increased their risk in a potential bond market crash. Just as a five-year CD pays more than a one-year CD, longer-dated bonds have better rates. But their prices are also more vulnerable to interest-rate increases, magnifying their future losses if rates rise sharply. Brokerage firm UBS (UBS) even plans to take the extraordinary step of classifying bond investors as “aggressive” because of the firm’s negative outlook for the bond market.
Where Can You Take Cover
Goldman and other Wall Street firms can use expert strategies and complex financial products like derivatives to give them protection against rising rates and falling bond prices. For regular investors, though, the options are more limited.
Here are some ways you can take cover if you agree that a bond-market crash is coming: Experts have been calling for a bond-market crash for many years, and so far, their cries have fallen on deaf ears. With more signs pointing to a healthier economy, though, rising rates look like they’re getting closer. Take these simple steps and you’ll reduce your losses if a bond-market crash happens.
For more on smart investing:You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger. Motley Fool newsletter services have recommended Goldman Sachs.
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