Fear Mongers Scream: Sell Bonds NOW (And Why You Shouldn't)

Investors know Marc Faber (publisher of Gloom, Boom & Doom Report) as the guy who called the Black Monday crash of 1987 (he told investors the week before to sell their stocks) and correctly stated we were entering a 'bear' stock market in August 2007 (the S&P 500 peaked 2 months later before crashing over 50%).

Today, he is stating interest rates should begin to rise within 3 months, the US dollar is set to gain strength.  The government is forecasted to embark on a second round of purchasing government debt (QE2).  All of this is inflationary and potentially bad for current bond holders.

Even Warren Buffett has stated that investors who buy bonds now "are making a mistake".

So, why not sell every bond you can get your hands on?

Several reasons to maintain your bond holdings:

• First, like any good investment, your bond holdings were hopefully part of an overall asset allocation strategy; one that included bonds for income and principal preservation. 
• Upon purchase, you know exactly the yield-to-maturity of your bond which includes all interest payments and return of principal.  If you intention is to hold your bond until maturity, intermediate price fluctuations are irrelevant.
• Bond mutual funds provide excellent diversification depending upon the stated investment objective of the fund manager.  This is the area where investors need to exercise caution in a rising interest rate environment due to the nature of bond funds with an active strategy.  Due to turnover in the funds, an investor could realize losses with increasing interest rates.  
• US Government-backed bonds may be important to you.  These are the safest bonds and, if held to maturity, enjoy ultimate safety and liquidity.
• High quality general obligation (backed by the tax-authority of the issuing municipality) bonds are often exempt from federal taxes and, in some cases, state and local taxes.  More importantly, the secondary  market is dominated by retail investors (36%), mutual funds (34%) with retail trades accounting for 80% of trading volume. Foreign investors typically do not hold municipals.  The municipal market therefore tends to be less volatile than the stock market where hedge funds and larger institutions, on the worst days, drive volume and volatility.
• If you are employing a bond ladder strategy, it could prove disastrous to interrupt the maturity schedule by selling early and possibly losing principal in a rising rate environment.

CONCLUSION:  Rising interest rates provide a clarion call to review all investments particularly bond holdings.   Each asset whether it is a stock, mutual fund, bond, CD, etc. should be part of an overall strategy whether implemented by a fee-only, financial advisor or an individual.