An Argument Against Asset Allocation

"General, I have been with these Indians for 30 years, and this is the largest village I have ever heard of." -- Mitch Bouyer, General George Custer's scout.

NEW YORK ( TheStreet) -- Unfortunately, the warning went unheeded and later that day the battle of Little Bighorn River was over.

The U.S. Seventh Cavalry, including a force of 700 men led by George Armstrong Custer, suffered a severe defeat. Five of the Seventh Cavalry's companies were annihilated; Custer was killed, as were two of his brothers, a nephew and a brother-in-law. The total U.S. casualty count, including scouts, was 268 dead and 55 injured.

Custer was warned and he did not listen, he stayed the course. I have been sending out dire warnings about the bond market for the last several months. I hope you listened.

Here is what last week's massacre looked like:

Just about anything that looked, smelled or resembled a bond (except James Bond) got absolutely murdered this past week. It was not like there was not any advance warning. Even Custer -- without the help of modern day drones, satellite imagery, and wiretaps -- could have averted a tragedy if he would of listened to his scouts. Instead he stubbornly forged ahead and stayed the course.

I heard all kinds of excuses from many so-called financial experts leading up to this massacre.

Excuse Number One:

"Treasuries should be bought for the long term. You are now averaging down and buying them at a cheaper price."

Why would someone give lame advice like that? Stupidity, naivety, ignorance, or all of the above? Here is how that advice worked out:

Bonds have been perched on the precipice of a cliff for several months now, and it was just a matter of time before they took the plunge.

Excuse Number Two:

"You are invested in Treasuries protected for inflation (TIPS). You need an inflation hedge in your portfolio. Inflation is getting ready to rear its ugly head again."

Wrong again.

TIPS got scalped, too. Inflation hedge indeed!

Excuse Number Three:

"You are earning double tax-free income. You don't have to pay any state or federal taxes. You are still going to get your dividend checks. Why should you care if interest rates go up?"

Terrible advice. What good is a 4% dividend if your principal loses 14%? That is a net loss of 10%. Do they still teach arithmetic in school?

I tweeted (@BillGunderson) on Thursday that the above chart of muni bonds was the worst chart that I had seen all day.

Excuse Number Four:

"High-yield bonds are still the best place to get an attractive yield."

Bad advice again. Junk bonds are just as susceptible to rising interest rates as any other kind of bond.

The chart above still looks like it still has a long ways to go on the downside.

Excuse Number Five:

"Who cares about what America does with its monetary policy, we own foreign bonds, they could care less what Federal Reserve Chairman Ben Bernanke does."

No! Rising rates in America infect the global bond market, too.

Sovereign debt indeed. Shaken and stirred!

So, do you still believe in staying the course with an asset allocation model?

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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