Unlike with food, the best time to buy stocks is when they stink so badly that nobody else wants to own them. Human nature seems to dictate our desire to stay away from “losers” and avoid them like the plague. Rather than viewing quality stocks that have declined in price as items that have just “gone on sale,” most people treat them like rotten tomatoes.
The problem with “winners,” however, is that by the time most investors begin to trust that magnificent winner of a stock, and/or the stock market as a whole, both have already run their course and are due for a pullback — which is pretty much where we currently stand with regard to stocks. Fortunately, though, the opposite may be true for corporate bonds.
At this point in time there are so many investors who are so jittery about the Fed’s next move that any hint of a change in Fed policy is enough to send the bond market reeling. Since May 1st, when it reached a low of 1.66 percent, the 10-Yr. Treasury note’s yield has risen 32.53 percent to 2.20 percent (as of Tuesday’s close). Investors are spooked by the proposition that the Fed may soon end its bond buying program, known fondly as “Operation Twist.”
Personally, I will be delighted when bond rates begin to rise. Though that will mean higher borrowing costs for businesses and consumers, it will also mean better opportunities for savers and conservative investors to make money. Since the onset of what now appears to be a legitimate bond market correction, prices for corporate bonds, corporate bond funds and corporate bond ETFs have fallen, rather significantly I might add. One of my favorite corporate bond investments is Vanguard’s Long Term Corporate Bond ETF (VCLT). From its high of $93.68 on 4/29/2013, VCLT has dropped ~9.0 percent.
For me, this is great news because it means that VCLT is finally going on sale.
Thus far, VCLT has nearly retraced all of its gains from its low of $83.53 on 3/20/2012 to its high of $95.36 on 10/15/2012. When the ETF gets closer to the $83.50 per share range, it is my intention to purchase a few more shares in my IRA and in my daughter’s UTMA account. Presently, the SEC dividend yield for VCLT is a cool 4.76 percent, but that will undoubtedly go up as VCLT’s price drops — and in today’s low yield environment, that ain’t hay.
Bottom Line: The Fed can not continue its easing and twisting gyrations forever, and when it does end its bond purchasing program the stock and bond markets will really see a rout; but that is not necessarily a bad thing. For those who are patient and who have money sitting on the sidelines, it will mark the next great opportunity to generate significant wealth.
Note: Treasury yield rate information was taken from U.S. Department of the Treasury’s Web site. Charting data provided compliments of optionsXpress.com.
Disclosure: I own shares of VCLT.
