Look at it this way with regard to your bond funds:  you are not earning enough interest on them to make a difference in your lifestyle, so why bother taking on the high risk of a big hit to your invested capital.
Currently, you should be concerned about the return of your money as opposed to the return on your money.

From PM Fund Manager Dave Kranzler:

Whenever I constructed a “difficult to sell” muni deal, I could count on the Rochester Family of Funds[Oppenheimer’s Rochester muni fund complex] to buy the deal if there was some “juice” in the yield. After all its other peoples money right? – an email from a multi-decade muni bond professional to IRD this a.m.

IRD warned about Oppenheimer’s exposure to Puerto Rico in July 2015

Puerto Rico officially filed bankruptcy and it appears that Oppenheimer Funds will be taking it on the chin to the tune of at least $2.1 billion in losses.  Oppenheimer was the biggest bagholder of PR bonds.  In July 2015, Investment Research Dynamics issued this warning about leaving money in Oppenheimer bond funds:

The Oppenheimer Funds mutual fund complex is the largest bagholder of Puerto Rico’s debt. including $4.4 billion of uninsured bonds. Not including tobacco bonds, insured debt and pre-funded bonds, as much as 13%  of some of Oppenheimer’s bond funds’ total holding holdings are in Puerto Rico bonds.  Oppenheimer Will Be A Bagholder

The Wall St Journal reported today that the “estimated” losses for mutual funds on PR bonds to be $5.4 billion, of which Oppenheimer’s estimated losses represent at least $2.1 billion, or 38% of the total estimated losses.

“Estimate” in this case is a guesstimate based on what’s been put on the table so far and based on the assumption that the current restructuring proposal will occur and that the new securities issued will maintain their “at issue” value.   As a former junk market professional specializing in special situations like this, I can say with certainty that the Wall Street Journal’s estimate of losses will end up being on the low side.

The July 2015 warning about Oppenheimer’s bond funds applies to ALL bond funds except perhaps short term U.S. Treasury bond funds, if you can verify that the specific fund you hold is free from any derivatives exposure – a proposition that is, at best, “iffy.”

I don’t know when the next financial crisis is going hit the markets but, when it does, the damage that will be inflicted on the stock and bond markets will dwarf what occurred in 2008.  That’s just one risk faced by bond funds.

Eventually the Fed will lose control of its ability to keep a lid on the short end of the Treasury curve.  Short term interest rates will correct rapidly by shooting up several hundred basis points in a price-discovery “correction” that will factor in the real rate of inflation (not the rigged CPI) and the real risk of default by the U.S. Government. In this context default is defined as either the halting of payments on U.S. Treasuries or, more likely, the “de facto” default that is implied when the Government has to print money in order to make the interest and principal payments.   When this “price discovery” event occurs, the value of all bond funds will plummet.

The message here is that it is time to get your money out of fixed income and equity mutual funds.   The risks embedded in these funds are not worth the probability of incurring a massive hit to your wealth that is held in mutual funds.  Eventually these funds will be “gated,” which will prevent you from withdrawing your money.

Look at it this way with regard to your bond funds:   you are not earning enough interest on them to make a difference in your lifestyle, so why bother taking on the high risk of a big hit to your invested capital.  Currently, you should be concerned about the return of your money as opposed to the return on your money.

    • @AGXIIK

       

      We’ve been hearing this refrain for the past 6+ years, yet during that time, the stock market has ripped PMs a new one… and it could very well continue to do that for some time to come.  Anyone who bought into the “get out now idea” when the market was at $12k has not seen their money just about double while those who stayed in have.

      I have NO idea when the S will HTF in terms of the stock or bond markets and neither does anyone else.  But I do know that corporate earnings have been very good in 2017 and are rising, not falling.  That bodes well for a continuing rise in US stock prices.  While a huge US stock market drop IS inevitable, that does not make it imminent.

       

  1. @Ed_B  Whether the markets are irrational or logical, it’s impossible to not recognize that the Plunge Protection Teams are working Ahnold-like on their Maximum Pumpitude, keeping everything inflated beyond normal capacities.  I was in the markets last year and did well on some issues in the miners and ETF but those have been kicked to the curb for now.  Not investing means I missed some opportunities.

    Trying to figure out if a crash is imminent makes me reach for the liniment, given the contortions one needs to engage in, trying to figure out which way to go and be ready to avoid the potential for a crash.

     

    • @AGXIIK

       

      “Whether the markets are irrational or logical, it’s impossible to not recognize that the Plunge Protection Teams are working Ahnold-like on their Maximum Pumpitude, keeping everything inflated beyond normal capacities.  I was in the markets last year and did well on some issues in the miners and ETF but those have been kicked to the curb for now.  Not investing means I missed some opportunities.”

      One man’s “inflation” is often another man’s “profit”.  When we buy paper that goes up, we’re being smart.  When we buy paper that goes down, then we’ve been foolish.  Same action, different result.  It is what it is.  Yes, there very often is opportunity cost to be concerned about.  But we can’t get too wrapped up in what might have happened, other than as a theoretical exercise.  If we do, we soon end up unable to function at all.  🙁

       
      “Trying to figure out if a crash is imminent makes me reach for the liniment, given the contortions one needs to engage in, trying to figure out which way to go and be ready to avoid the potential for a crash.”
      Agreed.  Which is why I try to hedge as best I can while covering the bases that seem most likely to occur.  I follow the theory that the simplest answer is usually the best answer and that the more outlandish something is, the less likely it is to occur.  Because of this, I pay no attention whatever to Earth, stellar, and galactic events where it is impossible to have ANY effect upon them whatever.  I devote my time and energy to the few small areas where I CAN have an effect on the future of my family.  This isn’t as exciting as a lot of what gets talked about on here but it IS more likely to be productive.  🙂

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