Bonds are Illiquid and Negative-Yielding. The Safe Side of Your Nest Egg is at Risk.
The Safe Side of Your Nest Egg is at Risk.
Bonds are illiquid and losing money. What does that mean? It means that there are a lot fewer buyers than there are sellers. If you want or need to sell your bonds, odds are extremely high that you’ll have to take a haircut, i.e. receive less money than you paid for it.
You might think, “Well, I’ll just hold on then.” However, the longer you hold on, the less valuable a negative-yielding, illiquid investment becomes. Additionally, you’re not getting paid for the risk that you will lose money on the investment itself. So now, while many investors are feeling more complacent and are less aware of the risk in bonds, could be a window of opportunity to secure the safe side of your nest egg from capital losses.
Check out the liquidity chart below.
Both bonds and the Dow Jones industrial Average were illiquid even last year – before the pandemic.
Why is there such a problem with bonds these days? Because too many slow-growth, debt-laden companies were borrowing more and more money at very low interest, and using the proceeds to repurchase their own stock and pay high dividends. Meanwhile, many of these companies neglected to pay down debt, save for a rainy day, or invest in R&D and their team. Boeing is the poster child of this scenario, with corporate buybacks of $9.3 billion in 2018, while $20.3 billion of their pensions and Other Post-Employment Benefits (OPEBs) were underfunded. After a few of their planes had epic failures, the 737 Max was grounded, and then the pandemic hit. Boeing’s credit is at the lowest rung of investment grade, with a negative outlook from S&P Global Ratings.
Financial Challenges Remain Heightened for Vulnerable Companies
The pandemic sparked a financial crisis in March of this year – before the first stay-at-home order was issued in the U.S., as a result of having too many companies carrying too much debt.
On November 5, 2020, the Federal Reserve Board released a press release, writing, “The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.”
Bonds Normally Earn Gains in Recessions
Bonds earned gains in the last two recessions. However, in 2020, bonds are losing money. In the Dot Com Recession, the Federal Reserve was able to start their interest rate cuts from 6.5%. As the Feds cut rates, bond investors became very interested in the bonds that were paying a higher premium. If you wanted to sell your bond, you could sell it for up to 25% more than you paid for it. The same was true in the Great Recession, when the Feds started their rate cuts from 4.75%. Today, with interest rates at zero, there are few buyers willing to take on the risk of holding bonds in an over-leveraged world, which is why bonds are illiquid and negative-yielding (losing money).
Over 50% of the S&P500 is At or Near Junk Bond Status
Over half of the S&P500 companies are at or near junk bond status. When a company gets downgraded, their bonds become even more illiquid. The gap down can occur overnight. (You didn’t receive advance notice before Ford Motor Company was downgraded to junk. However, if you knew where to look for the corporate debt and liabilities, the event was easy to foretell.) There are currently 111 companies on the S&P Global Potential Fallen Angel List. These are companies that are at risk of being downgraded to junk bond status in the near term.
As you can see in the chart above, financial institutions are at most risk of being downgraded. There are over 20 at BBB- financial services companies with a negative outlook, including Discover, Ally Financial, Bank of Ireland (Ireland), Cit Bank, Synchrony Financial, Virgin Money (U.K.) and more. The 2nd most vulnerable industry is media and entertainment (including casinos and hotels). Many companies in this sector have already been downgraded, including Carnival Corp. and Royal Caribbean. Other companies at risk of a downgrade to speculative status include Expedia, Hyatt Hotels, InterContinental Hotels and Marriott.
Las Vegas Sands is on CreditWatch Negative (along with four other companies), meaning the company has only 90 days or less to overcome their current challenges before potentially being downgraded to speculative status. The remaining 106 companies on the list have anywhere from six to 24 months to make things right.
What’s Safe in Today’s Recession?
Getting safe in 2020 is so tricky that I spend one full day on this topic at my retreat. There is an entire section discussing this in The ABCs of Money. Getting safe is a two-step process. The first step is keeping your money, perhaps in FDIC-insured cash. The 2nd step is to invest in safe, income-producing hard assets that you purchase for a good price. You’ll have to consider what can safely produce an income in a world where 52% of young adults between 18 and 29 are living with a parent, and unemployment is so high.
Clearly there is a lot to consider and learn. However, the price of not getting this right can be devastating. The reason most people don't buy low is that they can't buy low. When you don't have liquidity and you've lost too much money, all you can do is hope and pray to recover from your losses. If you keep enough safe and liquid, then you may find opportunities in bonds in a few years, when the risk is lower and the reward is more attractive.
Getting Safe is Not Market Timing
Keeping a percentage equal to your age safe and overweighting safe in a recession is not market timing. You always want to have an appropriate amount at risk that is properly diversified and rebalanced one to three times a year. Jumping all in or all out of stocks and bonds is a losing strategy. You want to put your emotions aside, and rely upon wisdom and a time-proven strategy for your long-run game plan. This diversified, rebalanced plan is easy-as-a-pie-chart and earned gains in the last two recessions, while outperforming the bull markets in between.
You can read about this recession-proof, wealth-preservation strategy in The ABCs of Money 4th edition. You can learn and implement this strategy by attending the Jan. 16-18, 2021 Retreat. If you’d like to protect your wealth now, then call 310-430-2397 or email info@NataliePace.com to receive an unbiased 2nd opinion on your current plan, alongside a blueprint for proper diversification and protection.
Buy & Hope is a last-century strategy that has lost more than half in the last two recessions. We now live in a world where economic expansions end with “episodes of financial instability” (Jerome Powell’s words), which is why 21st Century recessions look more like depressions.
Hopefully we’ll break free of fueling economic expansions with low interest rates in the coming decades. Low interest rates create asset bubbles. When asset bubbles pop, the drop is more rapid and severe. Between February 19, 2020 and March 23, 2020, the U.S. stock market saw the most rapid shift from a bull to bear market in history. If you wait for the headlines, it’s too late to protect yourself. A better idea is to fix the roof now, while the sun is still shining – before winter sets in.
The last two recessions cost most Americans more than half of their wealth. Millions of homes were foreclosed on, short sold, went to auction or became bank-owned. There are still 3.5 million homeowners who are severely underwater on their mortgage. The current rally in stocks and real estate affords all of us a 2nd chance to get a better plan. I encourage you to take this information and data seriously, and do as much as you can to batten down the hatches on your financial future before the economic storms on the horizon make landfall.
Register for the Jan. 16-18, 2021 New Year, New You Retreat by Nov. 30, 2020 to receive the best price. Learn more in the retreat flyer. (Click to access).
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Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.
ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.
Information has been obtained from sources believed to be reliable. However, NataliePace.com does not warrant its completeness or accuracy. Opinions constitute our judgment as of the date of this publication and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.
About Natalie Pace
Natalie Wynne Pace is an Advocate for Sustainability, Financial Literacy & Women's Empowerment. She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical), with over 120,000 downloads and a mean 5-star ranking. The 4th edition of The ABCs of Money was released on October 17, 2020.
Natalie Pace's easy as a pie chart nest egg strategies earned gains in the last two recessions and have outperformed the bull markets in between. That is why her Investor Educational Retreats, books and private coaching are enthusiastically recommended by Nobel Prize winning economist Gary S. Becker, TD AMERITRADE chairman Joe Moglia, Kay Koplovitz and many Main Street investors who have transformed their lives using her Thrive Budget and investing strategies. Click to view a video testimonial from Nilo Bolden.
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Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Power of 8 Billion: It's Up to Us, The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She is a repeat guest & speaker on national news shows and stages. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.