Investors Ignoring Risks, Throwing Sanity Out the Window
If you’re trying to build a retirement portfolio, investing for the long term, it’s important to be careful. A dangerous precedent is being set right now, and it could lead to an immense problem. Major portfolio losses could be possible.
Before going into any details, let it be known: this is not a recommendation to sell everything and sit on the sidelines. This is just a cautionary note. Understand that, no matter what the market is doing, there are always opportunities. Don’t let this discourage you.
Now, going into the details…
Highest Amount of Junk Bonds Issued on Record
This statement may sound harsh, but it’s worth making: investors may have lost their minds. It almost seems as if they’re losing touch with reality. They’re ignoring major risks.
Recently, we’ve been seeing significant demand for high-yield bonds. Note that “high-yield bond” is just another term for “junk bond.” These are bonds issued by companies that have low odds of surviving and making their debt payments.
Regardless, investors have been jumping on them.
Imagine someone you know who doesn’t have a job, and has low chances of getting a job, comes to you and says, “Give me a loan.” Would you give them a loan? Most likely not.
Junk bonds are like loans that may never be paid back.
Consider this: between January and October 2020, $358.0 billion worth of junk bonds were issued in the U.S. In the same period a year ago, junk bond issuance amounted to $228.2 billion. This represents an increase of 57.1% year-over-year. (Source: “U.S. Corporate Bond Issuance,” Securities Industry and Financial Markets Association, last accessed November 13, 2020.)
In other words, so far this year, investors have given loans of $358.0 billion to companies that may not be able to pay them back.
For the entire year of 2019, junk bond issuance was only $279.0 billion. Assuming that no junk bonds are issued in November and December 2020 (unlikely), junk bond issuance this year will surpass the 2019 figure by 28.3%. Here’s something even more concerning: 2020 isn’t done yet and the $358.0-billion figure is already the highest yearly junk debt issuance on record.
Do Not Get Complacent
Dear reader, I don’t want to be an alarmist, but I’d like to stress that you shouldn’t get complacent.
Investors buying up junk bonds is just one example of sanity being thrown out the window. I see this sort of thing prevailing in other assets as well. For instance, the stock market is trading at historically high valuations, but investors are buying stocks hand over fist and their sentiment remains that the stock market can’t go down.
So what’s ahead? I’ve spent some time reading about mania, bubbles, and related topics. Whenever this sort of mentality prevails—with risky assets getting significant attention and being bought in droves—it’s time to pause and reflect, at the very least.
The music may go on for a bit, but when it stops, it won’t be pretty. A lot of complacent investors could be caught off guard and may be forced to sell very quickly. Panic selling on a large scale could be the result.