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Who really owns bonds?

December 4, 2011 Leave a comment

This blog will try to characterize who owns bonds.  As identified in my last blog, the Total Corporate and Foreign Bond market as identified in the Federal Reserve Flow of Funds documents is $11.3 Trillion dollars.  It is mostly made up of traditional Corporate Bonds, Asset Backed Securities and Bonds issued by Commercial Banks or Bank Holding Companies.  The following chart shows who owns this $11.3 Trillion Dollars in Bonds:

The number one owner somewhat to my surprise isn’t Americans at all it, but is Foreign Investors.  This is followed by Insurance Companies.  Ownership of bonds by families is next either by owning individual bonds or through mutual funds (both at 15%).  So, the average family owns about 30% of the bond market.  For are mythical average American Family this would be about   $11.3 Trillion Total Bond Market * 30% Owned by Individuals / 95.6 Million Families = $36,000.  This $36.000 per Family would be evenly divided between individual bonds they owned ($18,000) and bond funds they had invested in ($18,000).

As we saw in earlier postings, you need to dig a little deeper to find out really what the average family owns.  For example, looking at the difference between average (mean) and median ownership.  Also, looking at the wealth of the people owning the bonds and their age would be interesting to know just like we did for stocks.  Digging back into the Survey  of Consumer Finances (SCF) Study by the Federal Reserve we can get a little bit of a deeper insight into who really owns bonds.  The first surprise is how few people actually hold bonds for how big the market is.  Direct bond ownership has been decreasing dramatically over the last few years as evidenced by the following chart:

So, if only about 1.5% of families actually own bonds directly and that means the average value of the bonds a family holding bonds would be $18,000 Direct Bond Ownership per all families / 1.5% families owning bonds = $1.2 Million.  In other words the average direct holder of bonds isn’t your average Joe or Jane, it is someone with a lot of money.  It looks like bond ownership is highly concentrated with the wealthy from this chart.  Looking into more statistics from the SCF Study they show the median value of families owning bonds to be much less than the mean or average ownership of about $1.2 Million.  Even though it is much less than the average (mean), it has been growing.  Again, this points out to concentration towards the higher end of the wealth bands.  The median was about $80,000 and growing in 2007.  It would be interesting to see what it is now, but, we must wait on the next SCF study released in 2012 for that.

As you would expect total bond holding is concentrated with the wealthiest 10% of families with the them holding over 50% of the total bond market in terms of value.  This is a little lower than the 60%+ they own of the stock market.  In terms of age, as you would expect, the older we get the more bonds we tend to own versus stocks with over 95% of bonds owned by people over 50.  That would make sense as a bond can provide income if you are retired and is considered to be less risky than stock market investing for those not willing to risk as much of their portfolio as they get near retirement.  We will look at the relative risk of stock versus bond ownership in a future blog.

In summary, bonds are not nearly as widely owned as stocks with only 1.5% of families owning bonds versus around 18% owning stocks.  Using medians as are measure of the individual typical investor, if you do own bonds you own about $80,000 worth of bonds versus the $107,000 worth of stock.  The SCF does not give us insight to the bond funds we own, but, I would hazard a guess that they are much more liberally sprinkled across stock ownership.  Remember the pooled investments (i.e. mutual funds and bond funds) were owned by about 12% of families.  The median value of these pooled funds per family was about $55,000 per year and has been consistently growing.  This means that a lot of families are not choosing to invest in individual stocks and bonds, but, instead are becoming “pooled” or fund investors.  Part of this is the growth of Exchange Traded Funds, as well as, traditional Mutual Funds.  While bonds are an important part of our economy not many people are directly invested in them.

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Categories: Bonds, Uncategorized

Confessions of An Ignorant Investor

July 10, 2011 Leave a comment

I have been investing in markets, making money and losing money, for some time now.  I listen eagerly for the latest news about what is happening, spending at least an hour each day perusing Yahoo Finance, WSJ, The Motley Fool, Seeking Alpha, etc.  I have tried being a fundamental investor and I have tried detailed technical analysis.  I have devised many trading strategies using my knowledge of Amibroker and its’ dazzling array of technical indicators.  I carefully follow strategies that according to my technical analysis have looked promising, only to have marginal success.  I have thought many times that I had figured some of this out, only to end up being a sap that can’t time the market.  I read advice column after advice column of what to do in the stock market, all written by people who are trying to make money off my ignorance.  In summary, I am a somewhat ignorant and certainly discouraged investor.  In other words, I am just your average individual investor.

Although having some training in Economics many years ago in college.  My career has been in the Technical Professions and I am a Fellow at a large company that specializes in large system integration.  While I have succeeded in this profession, I have not had that type of success as an investor.  My initial reaction was that I was just not applying enough mathematical and statistical analysis to the market and hence a deep dive into technical analysis.  While this appealed to my scientific nature, it didn’t prove to be on the whole all that successful.

I had gotten out of the market a few months ago because a trading philosophy I had devised was whip sawing me.  I was trying to apply a swing trading theory that you should get out with a 2% loss (capital protection) and also to take profits at predetermined times.  While everybody else was making money, this approach using technical indicators I had back-tested and looked promising did not keep up with the S&P 500 index.  Looking back at this, I had decided I was pulling the trigger too quickly.  So, I decided on a new approach, once again very well back-tested, to apply a long/short ETF philosophy based on MACD crossovers that I would only trade on a weekly basis to avoid the whipsaw.  This new approach again couldn’t stand the almost schizophrenic movements of the market.

Why does application of mathematical and statistical approaches, that have served me well in my technology career, fail me in the Stock Market?  My conclusion I have come to is that in my profession, I understand the underlying principles of the various systems and how they interact.  I can go to a white-board and draw this and discuss how things work in detail.  When it comes to the Stock Market, in many cases, I can’t.  I am applying formulas  and technical strategies without thinking through why they should work from a fundamental economic perspective.  I simply do not have enough background or grasp of simple models to be successful in the stock market.  I basically have been applying a “voodoo” approach to investing by taking advice from “experts”.

Why should this interest you?  My confession of being ignorant should not matter to you at all.  The only reason you may have some interest is what I plan on doing is to start curing my current ignorant condition.  I plan on reading, studying and then blogging about what I think I have got a better understanding of.  So, if you are secretly an ignorant investor, like I am, you may be interested following this blog as I try to put a perspective on things.   So, come along on the journey as I try to get a basic understanding of the economy, stock markets and investing.  If nothing else help me sort it all out by commenting on what I am getting wrong!

I want to be wise, like Buddha,  when it comes to managing Mojo’s Money.

Categories: Uncategorized