THE COST OF WAITING
1st ANNIVERSARY
Trying to time the market?
A year ago, some investors told us that they'd like to invest in
municipal bonds, but felt that rates were too low and would prefer
to wait until they rose. We, however, have always strongly believed
that the most successful investors do not attempt to time the market.
Instead, they buy bonds when their funds are available.
As a result of this discussion last year, we began monitoring two
hypothetical investors. At that time, AAA insured bonds were yielding
5.60%.
Investor A, not trying to outguess the market, bought $100,000 of
these insured bonds.
Investor B, convinced that rates would be rising, decided to wait
for bonds to yield 6.00%. In the meantime, he parked his $100,000
in a tax-free money market paying 2.25% and waited for the higher
rates he was certain were just around the corner.
Now, one year later, Investor A's 5.60% bonds have returned $5,600.
Investor B, meanwhile, has watched his money market rate drop to
.65%, resulting in an average return of 1.3%, or $1,300 in the prior
12 months.
The Cost of Waiting
Over the past year, Investor B has earned $4,300 less than Investor
A. He probably doesn't realize that even if he could buy a 6% bond
today, it would take 10.75 years to match Investor A's return on
his capital. Unfortunately, there are no AAA bonds yielding close
to 6%.
Even worse, Investor B is starting to fear that interest rates may
not be going higher. In fact, contrary to what the financial media
has been predicting, rates may be heading even lower. Tired of waiting
for rates to rise and questioning whether he was even beating the
rate of inflation with the meager returns from his money market
account, Investor B decided to bite the bullet and purchase $100,000
5%, AAA-insured tax-free bonds.
For purposes of our illustration, let's say Investor B has a brother,
Investor C. Investor C also had investment funds earmarked for the
bond market, but wasn't convinced by his brother's experience. He
said he couldn't recall a time when interest rates were lower, so
they must be heading higher soon. He decided to delay his investment
until then.
Can Investor C outguess his brother and successfully time the market?
Stay tuned. We'll check back with these investors in a few months
to monitor their progress.
06/01/02
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