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.
