Behavioral finance – the study of how emotions impact investment decisions – has always been a favorite topic of ours. Longtime friends and clients know we love climbing onto our soapbox to rail against short-term, kneejerk, irrational and emotional decisions caused by an overwhelming desire to act for the sake of acting in a desperate attempt to do what feels good rather than makes sense.

The scenario is unfolding before our eyes once again. The cycle of “buy high – sell low” is repeating itself.

Since 2008 the typical investor hid like a turtle in its shell. He blew out his equity portfolio after the markets collapsed in late 2008 / early 2009 and missed out on the 70% run-up since then. Now after watching cash holdings earn nothing he’s plowing into bond funds in search of safe yield.

The problem of course is there is no safety in bonds. Interest rates as measured by the 10 yr Treasury began an uptrend in 1954 rising from 2% to a peak of 16% in 1982. Rates then began a downtrend culminating in a trough of 2% in 2008.

The long-term secular trend coupled with historically low rates makes clear there’s nowhere to go but up. Rates go up, bond prices go down and principal is lost. So much for safety!

It’s like watching a train wreck in slow motion – we can see it coming but can’t stop it. Who will bond fund investors blame this time?

For additional thoughts check out this article appearing recently in the NY Times.