If recent fund flows are any indication then the sad truth is the typical retail investor continues to prefer the ‘buy high, sell low’ approach.
The past few years have seen investors pile into the perceived safety of bonds despite record low interest rates and, in many cases, negative real returns (nominal returns adjusted for inflation). Even worse has been their preference for bond funds – a collection of bonds that lack the fixed maturity of individual bonds. As a result yield-to-maturity becomes less of a certainty. The certainty is that when rates rise bond prices fall. Investors in bond funds can and will lose money.
Recently fund giant PIMCO and bond king Bill Gross reported that PIMCO Total Return – the flagship fund – lost 2.6% of its value in June as interest rates rose on the indication that Bernanke & Co. will begin to curtail their bond buying. Investors responded to the fund losses by pulling $9.9 billion from the fund.
The proverbial handwriting on the wall has been there for quite some time. Interest rates have nowhere to go but up. Bond prices have nowhere to go but down. Holders of individual bonds can ride out the paper gains and losses until maturity when they earn their promised yield (assuming no default of course). Holders of bond funds have no choice but to be at the mercy of interest rate fluctuations.
The sell after the fact decision of PIMCO’s shareholders seems to confirm that self-defeating behaviors are alive and well. It’s truly sad.