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Why Bonds Are the Riskiest Asset Class

Rob Russell

Sophisticated real estate investors understand the proper use of debt and how it can juice up your investment when used prudently. Small business owners also understand the appropriate use of debt: to grow business, buy out competitors, innovate, and expand operations. Those in the know understand the correct use of debt. Everyone else is investing in bad debt.

I believe the next BIG bubble is built on a mountain of bad debt $95 trillion dollars high. I call it bad debt because I believe that it will explode and annihilate trillions in wealth across the globe. This bad debt that has created the next bubble is in fixed income. Fixed income, or bonds, appears safe, but once you pull back the covers, you see the naked truth.

The naked truth

Bonds have had such a wild 30+ year run that investors have piled their savings into them at precisely the wrong time. See, the crux of this bubble is so simple, so easy to comprehend, that you can grasp it with a grade school metaphor: the seesaw.

Do you remember playing on the seesaw at school? If you were like me, you never wanted to share the seesaw with the "heavy" kid in class because you would skyrocket in the air when he got on!

If you can understand how a seesaw works, then you'll understand why bonds are the next bubble. On the bond seesaw, you have interest rates on one end and bond prices on the other end. It doesn't take a rocket scientist to figure out where interest rates are right now. Just take a look at your checking account, savings account, CDs, or money market accounts. Your money is earning pretty darn near zero. So, the skinny kid is bond prices, which have skyrocketed.

Pretty simple, huh? Interest rates are at historic lows, so bond prices are at historic highs. I believe that if you're holding or buying bonds or bond funds at this point in time, you are buying at such an extreme high it could be like buying tech stocks or real estate at their bubble highs.

When the "heavy" kid gets off the seesaw, the skinny kid crashes to the ground. In other words, when interest rates rise (even a nominal amount), bond prices fall. The relationship between rates and bond prices is pretty dramatic at the current sky-high levels.

Much to my surprise, even the world's largest bond manager, Bill Gross, co-founder of PIMCO, echoes my bond bubble fears: "Unless a hundred years of financial history are meaningless, bonds must go down--and yields, and interest rates, up," he noted.

The old investment adage applies here; buy LOW, sell HIGH. So, the question becomes: Should you be selling bonds right now while they're at an all-time high? I believe so. And you should be redeploying the funds into investments that provide bond-like characteristics (market insulation and stable income) so that your asset allocation isn't thrown out of whack.

Robert Russell is CEO & CIO of the Ohio-based Russell & Company, a private wealth management firm specializing in helping affluent individuals ages 45 and up create and preserve their wealth. He co-hosts a radio show, authors The Rob Report blog, and is a frequent contributor to FOX Business and CNBC.

Securities offered through Kalos Capital, Inc., Member FINRA, SIPC. Investment Advisory Services offered through Kalos Management, Inc., 3780 Mansell Rd. Suite 150, Alpharetta, GA 30022, (678) 356-1100. Russell & Company is not an affiliate or subsidiary of Kalos Capital, Inc. or Kalos Management, Inc.

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