Five years after the last serious stock market crash, some financial advisors and institutions, including Goldman Sachs, are claiming the bond market is next.
Their reasoning is based on a number of factors, including that interest rates are near historic lows and many companies have been issuing large numbers of bonds into the market in hopes of capitalizing on cheap financing rates before they vanish.
The brokerage firm UBS began classifying bond investors as "aggressive" as a result of its dim view of the market's future. And Michael Pento, president of Pento Portfolio Strategies, predicts the bond market will crash by 2016.
Here are some ways you can prepare for the possibility of a bond market crash.
Invest in short-dated
Do this, and if interest rates rise, you don't have to wait nearly as long to reinvest in a bond paying higher rates. These also tend to hold their value better than their longer-term counterparts in a time when rates are rising.
Invest in inflation-protected savings bonds
These bonds, which include the Series I savings bond, pay returns based on the rate of inflation at a particular time. The rate changes every six months, but you are not required to pay taxes on your interest until you redeem the bonds.
Switch to Certificates of Deposit (CDs)
CDs offer you the opportunity to withdraw your money if you see rates rising significantly, so long as you pay an early withdrawal penalty and reinvest in a higher-yield CD.
Steer clear of high risk
Remember that the safest bond generally pays the lowest rates. While many investors are turning increasingly to high-yield "junk" investments in hopes of cashing in for more money, they are taking on a great deal of risk. If the companies that issued them default, they stand to lose their investments.
Consult a financial advisor
Few financial advisors will tell you to dump every bond in your portfolio. However, they might have suggestions about how to reduce your risk of being affected by a possible bond market crash. Such experts can help you make adjustments to your investment mix to help your investments weather any number of storms. Contact an Atlanta-area financial advisor to help you optimize your investment portfolio.