Do the Right Thing—At the Right Time (Part 3)

In the last two blog posts we explored historical returns of bonds and the value of your ‘safe money’ today. Since January 2008 and continuing into early 2013, investors have put nearly one TRILLION dollars into bond mutual funds alone, while taking OUT nearly a half-a-trillion from stocks. That strategy can work for a while … as long as interest rates continue to fall. But now, if interest rates have nowhere to go but up, what could account for the seemingly illogical continuing flood of money into bond funds that are paying basically nothing?

The answer lies in investors usually doing the right thing but often at the wrong time. Investors pull money out of the stock market when it has fallen. They put money back in after things feel ‘safer’ (when the markets have gone up). Similarly, they put money into bonds and other yielding assets at historically low yields and drive those yields even lower. While the purpose of these actions is to attempt to lower one’s fear of risk, it may in fact have the exact opposite result.

Our research suggests that if—likely when—interest rates return to historically normal levels, bond holders could be left holding the bag. Long-term Treasury bonds alone could lose almost 20%—and investors would feel the pain of 2008 again—but this time in their ‘safe’ money.

So what is to be done about it? Fortunately, interest rates are likely to stay low for a while yet, making the current highest risk to bond portfolios the slow erosion of purchasing power by inflation. While there may be no cause for panic, though, do not wait to do the right thing—at the wrong time.

 Our research offers that what we call ‘opportunistic’ yield-bearing investments can be a viable option and a graceful way to get away from lower-yielding government bonds and traditional investment-grade corporate bonds. Such non-traditional credit investments include Emerging Market bonds, bank loans, and mortgages. We also generally favor equities over fixed income in the current environment, and believe that an underweight in fixed income is likely a good strategic stance for the next few years.

The bottom line is: do not make the mistake of thinking that your ‘safe’ money is necessarily safe. This time, do the right thing at the right time.


Disclosure: The information contained in this summary is for informational purposes only and contains confidential and proprietary information that is subject to change without notice. Any opinions expressed are current only as of the time made and are subject to change without notice. This report may include estimates, projections or other forward looking statements, however, due to numerous factors, actual events may differ substantially from those presented. The graphs and tables making up this report have been based on unaudited, third-party data and performance information provided to us by one or more commercial databases. While we believe this information to be reliable, Convergent bears no responsibility whatsoever for any errors or omissions. Additionally, please be aware that past performance is not a guide to the future performance of any manager or strategy, and that the performance results displayed herein may have been adversely or favorably impacted by events and economic conditions that will not prevail in the future. Therefore, caution must be used in inferring that these results are indicative of the future performance of any strategy. Index results assume the re-investment of all dividends and interest. Moreover, the information provided is not intended to be, and should not be construed as, investment, legal or tax advice. Nothing contained herein should be construed as a recommendation or advice to purchase or sell any security, investment, or portfolio allocation. Any investment advice provided by Convergent is client specific based on each clients' risk tolerance and investment objectives. Please consult your Convergent Advisor directly for investment advice related to your specific investment portfolio. Non-deposit investment products are not FDIC insured, are not deposits or other obligations of Convergent Wealth Advisors, are not guaranteed by Convergent Wealth Advisors and involve investment risks, including the possible loss of principal.

Click here for disclosures regarding information contained in Dollars & Sense blog postings