One of the greatest modern era financial reads “This time is Different” by Reinhart and Rogoff covers eight centuries of financial folly. In covering a four word relic that has been used and abused, the authors left off the greatest bubble of all-the three decade debacle in the bond market. This week Kiplinger addressed this issue by calling for 6% Treasuries by 2020. That means a potentially crushing impact on net asset value or principal of a 30% loss on a ten year maturity or duration bond or bond fund. We have seen these rate rises in the last 4 years across Southern Europe and in the 70s in the US. With much more money invested in mutual funds and defined contribution retirement funds than the 70s, it will be interesting to see how fund managers who were in grade school in the 70s react.

Kiplinger also sees inflation creeping up to 4% as well which means to the average bond holder inflation and principal losses over 2020-2030 of  80% of purchasing power or for the many consumers and advisors who do mistime the market and sell or reallocate, actual losses. There are ways to safeguard principal against this potentially through utilizing a buckets of money approach that combines systematic withdrawal strategies(SWIP), laddered indexed CDs, floating rate funds/notes or Guaranteed Minimum Withdrawal(GMWB) on Annuities. Some of these strategies may enable up to 10% of the account value to be withdrawn annually so that reinvestment risk of higher rates and principal loss can be mitigated. When the movie” Ghostbusters” came out in 1984 rates were rising three percentage points to their last peak before resuming a plunge. 1984, besides being Orwell’s finest moment, was a poor year for equities even though dividend rates were higher than they are now. The theme song was “who you gonna call” We may being singing that tune again to the tune of tax busters and principal crushers so don’t fall for this time it’s different malarchy!

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