Time to Play Defense; Protection Outweighs Profits

Today's market action took a chunk of the year-to-date gains off the table, as the stock averages - Dow, S&P 500, and Nasdaq all declined by multiple percents (losses of 2.4 to 3% on those three indexes).

Protection of your money and defensive actions may be warranted depending on your appetite for or aversion to risk. Since the Dow Jones made its recent high in mid-July near 27,300, the defensive sectors of our economy have gained, while the rest show negative returns. 

Of the 10 S&P sectors, 8 are down; just Utilities and Real Estate show gains of about 2.5% each.

Gold's been on a tear, gaining about 8% this month so far, closing in on $1,550 an ounce after today's 2% gain or $30 an ounce pop! I show that a portfolio of 60% stocks, and 20% Gold and 20% bonds would be down about 1% this month vs. being down 4% if you held no gold. That's quite a value. In the past year, Gold's up $340 per ounce or +28%, and if you read my blog - I'm usually harping on owning some Gold to offset your investing risks in stocks.

Bonds were about even to up/down 1/2 percent today. But just look at this chart of the interest rates bonds are now paying. This is the 10 year U.S. Treasury Bond, which pays 1.53% today. It paid over 3% last November. The interest income you receive has been cut in half if you buy the bond today. 

This is very worrisome to savers and investors in bonds, CD's, annuities. It will favor borrowers / debtors with variable rate loans, or for folks refinancing homes, etc. The 30 year conventional mortgage averaged 2.92% last week.

Going out to 30 years, that bond is paying 2.03% today, the lowest in recorded history. Do the math considering the latest 12 month consumer inflation rate of 1.83%.

                       2.03% Government Bond
                     - 1.83% Price Inflation last 12 months
                     ----------
                       0.20% Your Real rate of return on the bond.
                 
Oh, and subtract taxes at just 12% - the lowest tax bracket now.
That would knock off about 1/4th percent off the Bond Yield, so now you your money is moving backward, a 0.05% loss.

Sure, many bonds pay more than 2%, but they are riskier. 
Run the numbers at 3% or 4% bonds and you get a +1% to +2% gain after taxes and inflation.

So in sum, be careful out there. Allocate your money amongst stocks, bonds, Gold and some cash. This 10-1/2 year old BULL market in stocks will end someday. Let's be prepared for the next BEAR market.

Thanks for reading. Pass this link along to those who would benefit please. http://moneyruminations.blogspot.com