Shorting Bonds in Your Portfolio

I try to practice what I preach or maybe it is more like preach what I practice.  My investment advice is no different except for the fact that each individual's situation is different.  I remember reading an article by Michael Rozeff talking about how he didn't always follow the same advice that he wrote in articles (or something to that effect) when it came to investing.

It is hard to give investment advice to everyone because each person's situation really is different.  Each individual is a different age, with a different net worth, with a different personality, with a different risk tolerance, etc.  That is why I like to recommend things, but at the same time provide a disclaimer of being a speculation, particularly with the higher risk moves.

With that said, let's talk about shorting the bond market.  Currently, I do not have any short positions in the bond market, or at least not directly.  I am a big advocate of Harry Browne's permanent portfolio, which happens to consist of 25% long-term government bonds.  I think for people who are less knowledgeable about investments and also less risk tolerant, they should just consider putting all of their investments in a permanent portfolio setup.  Then they can forget about it and sleep better at night.  Even many experienced investors would be better served by using the permanent portfolio.

Now, I have no idea what will happen with bonds tomorrow or one year from now.  If I had to guess, I would say that bonds will most likely move lower in the next several years.  It is not up to me to decide.  It is up to the market and the decisions of millions of people, along with the non-free market forces of politicians and the Federal Reserve.  But again, if I had to guess, I think that interest rates will eventually rise and will lower the price of bonds.

Since I am an advocate of the permanent portfolio, but I also want to speculate that interest rates will eventually go up, I have lightened up on bonds.  I see no point in directly shorting bonds, because I'm not confident enough at this point, particularly with the Fed buying them.  Instead, I have chosen to carry less than 25% of my investments in bonds.

There is nothing wrong with shorting bonds, even if you do have bonds elsewhere in your portfolio.  It is really up to you on how you want to go about it.  Again, I think there are heavy risks in shorting bonds right now, especially with QE2 (money creation) going on.  It is a risky play, but it is also a play that could pay off well if you are right.  So my recommendation is to lighten up on bonds from your permanent portfolio, but only for speculation purposes.  If you don't want to speculate (although everything carries some risk), then just put your investments in the permanent portfolio fund and forget about it.  For a mutual fund that somewhat mimics this, see symbol PRPFX.