Saturday December 24, 2011. So what should I invest in now?

Saturday December 24, 2011. So what should I invest in now?

So what should I invest in now? I'm still moving into high-yield bond mutual funds. I have had stocks that returned between 0 and 3.5% in the last ten years, while these bond funds have more than doubled in value. Past performance is no indication of the future, and yet, bonds thrive in a climate of low inflation and slow (but steady) economic growth. I feel the future of bonds is good because of the many systematic problems in the mature economies of the world. It does not look to me like they are going to pull themselves together and beat the return promised by the bonds. When you buy a stock, you sit and wait, hoping to sell it some day at a higher price. Some pay dividends, but yields are not exactly robust or dependable. On the other hand, bond funds pay interest monthly and in cash. FAGIX and SPHIX are reporting current 30-day yields of around 6%. A bond is traded on the open market, so the price fluctuates. That means you can lose on your investment. A bank CD has guaranteed principal but yields are almost nonexistent. So I feel that at least for myself, it is worth the bond market risk. Further, there is a curious thing about bond mutual funds: when the price drops, you can put them on income reinvest and accumulate more shares at a lower price. In fact, it could be argued that if the price of a fund goes down, it is beneficial to the investor in the long run, because the interest reinvested buys more share than it otherwise would. What presently keeps bond funds a good buy is the traditional propensity to look for higher returns on stocks. Stocks earned 10% a year for 100 years, while bonds returned only about half that. And yet, a strange thing happened since the 2007 crash and recession: those two numbers just about reversed themselves, and bonds are outperforming stocks. So is investing in bonds a wacky quacky idea? Not if you consider Blackrock Group or net fund inflows wacky quacky, because both indicated significant moves out of stocks and into bonds in 2011. With that said, is it now too late to get into bonds? I don't think so. I think we have another year to buy in. The reason I think that is that the major mature economies of the world are breaking down politically, in terms of cooperating to achieve common economic goals. Political parties are polarized around ideological lines, and practical considerations together with political compromises are considered close to treason. Neither group trusts the other, and both are disgusted with the politicians, including their own. This type of ideological thinking, black and white, good and bad, all or nothing results in rivals demonizing each other and not cooperating in good faith. Until the fabric of social and political order knits itself together along different lines, it is not likely that we are going to be able to see healthy economic growth by traditional standards. And while we stumble, the "third world tigers" pick up the pieces. Are mature economies dead? Nope, but they are behaving that way.