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Saturday, December 07, 2013
When looking at the moves in interest rates and the massive amounts of cash that has been leaving the individual bond market and bond funds it may make sense to start moving funds from your portfolio into cash to take advantage of the volatility being seen in the equity market.
Now there are numerous misunderstandings when it comes to constructing a portfolio protected against market risk.
Misconception Number 1: Bonds are secure, You can't lose money
Looking at bond performances through the eyes of the 10-year Treasury yield, in 1790 the yield was hovering around 5 percent. The yield hit a 220-year low of 1.4% in July 2012 and reached 1.7 just a couple months ago. The last time yields reached that level was approximately the time of the Great Depression which gives us some key insights.
Bonds are not always safe. Bond prices move in the opposite direction of yields. When yields increase the portfolio value of the bonds will decrease. From 1946 to 1981 bonds had a bear market because of the rise in yields which resulted in massive portfolio losses.
The Bond Bull, the greatest in U. S. history may be over. After thirty years bonds have been a great performer but it may be time to recognize that bond prices are set on a collision course with interest rates which could send prices down sharply.
Misconception Number 2: Interest rates can remain this low much longer
Several have kept their investment dollars, or what was left of them following the crash of 2008 in cash or money market funds. The idea that it's just too risky to invest in C.D.s for Bonds because the returns are just too low. The idea of waiting for this short term interest rate storm to pass might be a strategy that seems emotionally logical but doesn't fit with history.
The last time interest rates were this low was just following the Great Depression and looking at the yields of 2011 might give us an idea of when and where interest rates may be going.
Current rates are not generating income for savers. The 3-month Treasury has hit about .02% and hit the all-time low of .01% in 2011. For savers or investors who have kept their funds in cash have received no return or income for those years.
Looking back to when interest rates hit all time-lows they stayed their from the mid-thirties until the early-sixties. That's nearly thirty years of poor interest rates, we might be stuck where we're today for quite a while.
We have heard quite a bit about "tapering". However, many economists do not believe QE will be finished until nearly the end of 2014. Even if tapering is ended this may not cause interest rates to jump, the Fed has stated they will be monitoring the increase in interest rates while they watch the unemployment number in an effort to manage the economy.
Misconception Number 3: Volatility is just not your friend
Often times we see the financial networks get themselves up in a buzz when the markets show symptoms of weakness. This often causes many investors to head for the exits out of fear that worse times are on their way. This is not necessarily the reality.
If you look back at major indexes over the last number of years there were times of sharp declines which produced healthy climbs. These corrections are great opportunities to buy positions at cheaper prices. The natural question is how would you make sure these signs of volatility are not changes in the markets direction and not just a correction?
That question and these three misconceptions show consumers the absolute necessity of having a Fiduciary Relationship Manager on your side managing your Investment Team as you pursue retirement and stay retired.
Matt, who is Cheif Advisor at Aaron Matthews Financial Resources, is an authority on creating innovative tax and investment solutions to help his clients succeed in their retirement years. The strategies Matt Golab has generated and passed on through successful financial planning with hundreds of clients through the years has launched him into the national spotlight.If you would like contact information for Matt Golab, please simply click here. Investment Advisory Services offered through Global Financial Private Capital, LLC, an SEC. Registered Investment Advisor