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Rule 15: Don't Forget About Bonds

"Where are the bonds?"

That's how I used to begin every phone conversation when I was on the road,
away from my desk,
back when I ran my hedge fund.

People forget the bond market all the time.

They forgot it in 2000,
even though it told them the economy was softening.

They forgot it in 2001,
when it was clear that the cash rates were too competitive to stocks and would cause a massive selloff.

They forgot it when the Fed raises rates 17 times in lockstep fashion in the middle of the previous decade, precipitating the worst downturn since the Great Depression.

And there have been countless tape tantrums in the last decade where some fed official would strike a hawkish note and everyone would freak out that rates are headed much higher.

That's why I say:
Don't forget bonds.
Always keep those bond prices and interest rates in front of you.   

I was trained to focus on bonds because bonds are the competition to stocks, the competition I most fear.

When short-term rates go sky-high, you have to expect companies that had been bought for good yields -- stocks like American Electric Power or Ventas -- will sell off.

When long-term rates rise -- you have to be wary that all stocks might be worth more than they have been,

especially if rates are going higher because of a rise in inflation.

We have had the ideal environment for stocks:
low inflation and low rates

and I fear it has lulled us into not being careful -- or careful enough -- if we get a big spike in rates.

You need to watch more than the stocks.

If this were basketball, I would be saying that if you just watch the man with the ball,
let's call him Citigroup,
and you don't watch what the others are doing on defense -- the bonds --
there's no way you are getting to the basket.

The men without the ball -- the bond market -- can determine the action.

Many people who got in this game in the last decade still don't even know what bonds are.

They are troubled when you say bonds went up today.

They think that means interest rates are going up

rather than what it really means,
which is that interest rates are going down.

If you don't understand how bonds work, I think you will not be able to make nearly as much money as if you do.

So keep your eye on the ball, and on the bond men without it.

Action Alerts Plus portfolio manager and TheStreet's founder Jim Cramer has learned a lot over his 30+ years of investing. So he created a list of 25 Rules for Investing that can help you avoid the novice pitfalls that even he fell into on occasion.

 

Many people who got in this game in the last decade still don't even know what bonds are. 

Rule 15: Don't Forget About Bonds

Always keep those bond prices and interest rates in front of you, says Cramer.

Granted, we have had the ideal environment for stocks: low inflation and low interest rates.

"But I fear it has lulled us into not being careful -- or careful enough -- if we get a big spike in rates," he says.

So you need to watch more than the stocks.

"If this were basketball, I would be saying that you can't just watch the man with the ball," he says.

Listen to Rule #15 to hear why now!

And don't forget, we still are rolling out one-rule-a-day until we hit 25! So stay tuned!

Sign up and watch Jim Cramer's 25 Rules For Investing here!

 

And for more Investing Rules, watch these: