The Danger Lurking in Your Next Brokerage Statement

Most of our readers at the Motley Fool take more than a passing interest in their investments, keeping up to date on events hitting the financial markets. But for millions of Americans, the first clue of any signs of trouble in the markets will come shortly after the end of this month, as they get their quarterly brokerage and mutual fund account statements in the mail.

Inside those statements, there'll be some bad news for investors. But it won't come from the direction that most of them are expecting, especially if they've seen recent headlines about triple-digit moves in the stock market. Rather, what they'll see will convince them that they've once again been had, and they'll end up questioning their overall investment strategy as a result.

The big bad bond market
Investors have been taught that when they're scared of stocks, they should buy bonds. The reason to do so is that ordinarily, bonds are less volatile than stocks and less prone to see dramatic drops in value. As a result, if you're looking to reduce the overall ups and downs in your portfolio -- especially as you approach and reach retirement age -- then financial advisors will often point you toward buying bonds.

But these are anything but ordinary times. Massive bond purchases from the Federal Reserve at the rate of more than $1 trillion per year have arguably distorted the functioning of the bond market, and with the recent spike in bond yields after the Fed merely hinted at the eventuality of needing to reduce its purchasing program, evidence of that disruption appears clearer than ever.

Bond prices move in the opposite direction as yields. As a result, as you're opening your brokerage statements in early July, you can expect to see troubling results like these:

  • The biggest bond fund in the market, the PIMCO Total Return Fund (NASDAQMUTFUND: PTTRX  ) , is on track to lose almost 5% this quarter -- even taking the interest income that fund shareholders received into account. That comes despite the fund's emphasis on short-term bonds, which usually move less abruptly than longer-dated bonds, but the greater volatility reflects moves that the fund takes to boost its leverage.
  • Index investors won't see much better results. Vanguard Total Bond Market Index Fund (NASDAQMUTFUND: VBTLX  ) is down almost 4%, with its greater emphasis on Treasuries helping to offset the somewhat heavy concentration on bonds with maturities of 20 years or longer.
  • If you invest in some niche areas in bonds, expect a particularly harsh shock. iShares S&P National AMT-Free Muni Bond ETF (NYSEMKT: MUB  ) is down 8% so far this quarter, as tax-free bonds haven't been any haven from rising interest rates. International bond funds have gotten hit even harder, with PowerShares Emerging Markets Sovereign Debt (NYSEMKT: PCY  ) down 14% since the end of March as investors flee less-secure rising economies in favor of established markets.

In addition, even stocks geared at generating income haven't been immune. Mortgage-REIT Annaly Capital (NYSE: NLY  ) , once the go-to place for high-dividend yields and strong total returns, has plunged 20% since the beginning of April. A steepening yield curve might help mortgage REITs in the long run, but for now, the Fed's continuing purchases of mortgage-backed bonds hamper Annaly's ability to maximize its profits. More broadly, rising interest rates hurt a wide range of rate-sensitive stocks, and so you'll see many dividend-paying stocks having suffered somewhat deeper declines than the broader market.

What to expect
Unfortunately, even if you're smart enough not to panic-sell in the face of declines that have already occurred, many of the millions of people opening their brokerage statements to this nasty surprise won't be so disciplined. Therefore, you can expect further selling from emotion-driven investors, and smart buyers will likely wait until that selling pressure ends before jumping in to score bargain-basement bonds.

Don't be afraid of your brokerage statement, but don't ignore what it's telling you either. With many people getting their first taste of losses in a while, you need to prepare for what could become an even bumpier ride in the months to come.

The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 24, 2013, at 2:15 PM, toadaly wrote:

    Do people really wait to get their brokerage statements to figure out what their assets are worth? I can't imagine that's true for publically traded investments.

  • Report this Comment On June 24, 2013, at 2:54 PM, Stockgamblr wrote:

    Collect your NLY yield on June 27th, then get out.

  • Report this Comment On June 24, 2013, at 8:02 PM, bigongit1 wrote:

    For people with a long-term (10 year+) investment horizon, and holding some bond funds in a diversified dividend reinvestment portfolio, does it make sense to hold on to bond funds?

    I own PTTRX and some municipal bond mutual funds and closed end funds.

  • Report this Comment On June 24, 2013, at 8:59 PM, TMFGalagan wrote:

    @toadaly - You wouldn't think so, would you? But everything I've heard from financial pros is similar: statements go out, and only *then* do most clients start calling their advisors.

    best,

    dan (TMF Galagan)

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