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The Bond Crisis Part 2 - Challenging The Traditional Asset Allocation Model

In the first part of this article we looked at why the Bond market is in crisis. In this second part we will look at what happened in the bond marketi n 2020 and 2021 to date and what the elite investors are saying about it.

Challenges for the Bond Market in 2020 and 2021

The last year has been challenging. Bonds rallied as equities started to fall in February 2020, but when equity markets collapsed in March 2020 so did bonds.When equity markets bounced back, bonds did not. As a result, the long held assumption about the protection you get from holding bonds which is that bond prices rise when yields fall or the economy slumps has come into question. 

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The Bond Crisis - Challenging The Traditional Asset Allocation Model - Part 1

The Bond market is in crisis. The last 2-3 year market dynamics are challenging the effectiveness of the traditional "balanced portfolio model" comprising in general of a 60/40 Equity/Bond allocation, a model that has stood the test of time in manging risk and equity market cycles. In a close to zero interest rate climate with high inflationary risk, the investment rationale for holding bonds is now being called into question.

Let's dive a little deeper into the issue with a two part article. The first part looks at what is happening in the Bond market and the second part which we will publish mid-week will look at the trends in the bond market in 2020 and 2021 and what the elite of the investment world are saying about it.

What is happening with Bonds and Why?

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4 Powerful But Often Overlooked Ways to Free Up Capital for Investing in Your Financial Future

The expression that the “devil is in the details” refers to the little often overlooked items that can sometimes “cost you” whether it is an overlooked item requiring compliance, a payment or exit clause for ending a contract that you did not see or just overlooking some ingredients in a recipe that resulted in a dud recipe.

In the world of personal finance we can at times be stretched when trying to  find money in our budget to allocate to our investment and retirement plan. Inspecting our spending patterns and finding ways to cut expenses and save what may seem like small inconsequential expenditures can significantly miss  the “devil in the details” and the bigger financial picture.

We are discussing this by way of example to illustrate how this one exercise can make a big difference. Just imagine if your investments and all the other details concerning your wealth were managed with the same expert precision. As we will illustrate, it can make ALL the difference and ensure you enjoy a more comfortable retirement. Let’s look at just 4 examples of where you may be able to cut expenditures and then add up the savings and what the value of doing this for 5 years could add up to over a 25 year period.

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De-Fi: What is it & How It Is Changing the Financial Landscape?

De-FI is an abbreviation for Decentralised Finance and it is changing the global financial landscape. So, what exactly is decentralized finance? De-Fi has arisen in sync with the blockchain revolution and a smart contract platform called "Ethereum" which is an entire universe or the first world computer providing a base technology layer on which every conceivable application is being built to transact business in a secure, borderless and efficient manner. Decentralized Finance or the ability to trade stock, token or asset transactions on decentralized exchanges "peer to peer" without a middleman such as a traditional stock exchange, dramatically lowers the fee structure of what you would pay on a traditional exchange.  

You can now trade stocks, tokens and soon, every type of commodity, asset and collectable "peer to peer" directly without a "trusted middle party" e.g. a bank or stock exchange.These new decentralized platforms also known as DEX's are "Peer to Peer" and "trustless" meaning they do not require Person A knowing and trusting Person B to make a trade or exchange. The Decentralized Exchange (DEX) itself provides the mechanism for a secure exchange.

The Gamestop debacle has opened people's eyes to the fact that not only are "free trading" platforms such as Robinhood not free, they are also subject to censorship rendering the retail investor powerless when it suits the centralized exchanges. Retail buyers and sellers may not know it, but they pay a mark-up or mark-down in the price of any financial instrument (when they buy or sell) essentially paying a premiium for each transaction which is pocketed by the exchange and its partners. Furthermore, as Gamestop investors found out, once losses to a select number of hedge funds became too acute, Robinhood stepped in - under pressure from its peers - to halt or limit trading to the detriment of retail investors.

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Wealth Management Plans While Markets Sour

If you have been reading the market headlines this week, Gamestop and AMC's meteoric stock price increases have been in the news as the "revenge of retail" makes it's mark on the hedge fund industry. This incident has rattled the markets along with a more circumspect re-examination of expectations for a second half 2021 economic recovery given the new South Africa COVID-19 variant and delays in the vaccination supply. The dizzying rallies in Gamestop alongside new market highs and souring expectations has given pause for thought. Have the markets come too far, too soon!

In one of our earlier articles, we outlined why we think that 2021 could be a strong year for the market based on the massive stimulus that has been injected into the economy coupled with close to zero interest rates. We also noted that delays with the vaccination roll out and potential mutations could prolong the "COVID Blues" and delay an expected economic recovery. There are other potential issues such as an escalation of economic tensions with China. These "uncertainties" provide ample fodder for market corrections in a likely continuation of the bull market.

One Professor, Jeremy Siegel, author of "Stocks for the long run" shares a similar ooutlook and is not blinking an eye in the midst of this market correction, standing firm with his latest prediction that the Dow will reach at least 35,000 in 2021.

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Hawley Advisors is an investment advisor, registered with the State of California. Any investment ideas or strategies on this website are for the purposes of education and general information only and should not be construed as specific investment advice. For more information about our firm please check the SEC Public Disclosure website: https://www.adviserinfo.sec.gov/

 

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