From the NY Times: "Gross says a 10-year bond yield at 2.6% is a bigger deal than the DOW at 20,000"
Further, "If the yield on the benchmark 10-year U.S. Treasury moves above 2.60% a secular bear-bond market has begun"
What Billl Gross says is very simple in its math. As bond yields go up, the underlying value of the bonds go down. Our own fear is this.
- Many people participate in some kind of empoyer sponsored retirement plan. Defined Contribution plan, Group RRSP whatever.
- The investment decisions are made in a heartbeat as to what to invest in and usually done when first employed along with a mass of other paper work. Happily, the insurance companies have offered "Lifestyle" or the like kind of fund options that are based on your age. i.e. Older = more bonds. Younger = more equities.
- It all works looking in the rear view mirror when interest rates have dropped for the last 30 years. Now, the world has changed. We are in a rising rate environment i.e. the reverse is now true. When rates go up, bond go down.
So: 1 + 2 + 3 = That person who is 60 is mechanically put into an overweight position in bonds where, given the state of the world economy, they will probably LOSE MONEY !
Huh? What you need to do is:
1. Get out your company pension statement (Group RRSP) plan and have a look
2. Take a close view to see where the asset allocation is (i.e. a Balanced fund is going to have a bunch of fixed income, bonds. The "age or Lifestyle" funds are a slippery slope)
3. Balance your RRSP, TFSA, LIRA and other investments with your company retirement plan.
You don't want to be that 60 year old who has put faith and trust into products that are based on historic data that is no longer valid.
If you have questions. Just call.