The news is rife with analysis about interest rates, inflation, and the dollar, leading many to speculate that the next impending bubble to burst will be in the bond market. Looking at the flow of money over the past 18 to 24 months, it seems that investors have been loading the boat with bonds at the expense of equity. That has me nervous.
There are a few things that investors should be considering right now if they think that interest rates will be heading higher in the future and they own bonds.
Dump your active bond manager. Managers who "manage" bonds are usually appropriate when they can manage a portfolio of bonds for total return as interest rates decline (and bonds increase in value). With interest rates as low as they are, what's left to manage (and pay for) when they start to increase? Not much.
[See the Best Large-Cap Value Funds for the Long Term.]
Dump bonds in your portfolio that you won't hold to maturity. Most investors have an allocation to fixed income as part of their overall asset allocation strategy—and hopefully as part of a complete and comprehensive financial plan. Buying or holding any bond in your portfolio at this point should be a complete commitment to hold it until it matures. Otherwise, look out below.
Dump your myopic view of fixed income. Bonds are a component of fixed income, but an allocation to fixed income does not necessarily mean that 100 percent is in bonds. Fixed income is exactly that—an asset that provides a fixed income. While it's a little bit untraditional, look for income in unconventional places such as high-quality dividend paying stocks, REITs, and even some alternative structured products.
Dump your fear of equities. A 10-year treasury bond purchased now will have an annual yield of about 2.4 percent—and will not grow your principle. For the next 10 years! There are good companies out there that have solid businesses, solid balance sheets, and great products that have dividend yields north of 3 percent. You should own them. For the next 10 years!
Dump the 24-hour financial news cycle. Quit watching the TV and all the hype. Things may not be great right now or even for the next 6 months ... or even a year. But great investors look past the short term. Turn it off. TV stations sell advertising, not advice. Don't forget that.
If you have a complete and comprehensive financial plan, there is nothing going on today that warrants your immediate attention ... or your advisor's attention. The only thing that warrants immediate adjustment to any financial plan is an unexpected change to cash flow assumptions within the plan. In other words, unless you have lost your job, there is nothing going on today that requires immediate action. Period. Unless you are a day trader.
Finally, dump the bad attitude. Unless Americans have lost their passion, inspiration, or twill to innovate, the economy will one day be back on its feet and we will return to an environment of growth and prosperity.
David B. Armstrong CFA, is a Managing Director and co-founder of Monument Wealth Management in Alexandria VA, a full service Private Wealth Planning and wealth management firm. Monument Wealth Management is backed by LPL Financial, the independent broker-dealer and Registered Investment Advisor. He has been named one of America's Top 100 Financial Advisors for two straight years by Registered Rep Magazine (2009 & 2010) based on asset under management. David and Monument Wealth Management can be followed on their blog at "Off The Wall", their Twitter account @MonumentWealth, and on their Facebook page. Member FINRA/SIPC.
*The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for individual. To determine which investment is appropriate please consult your financial advisor prior to investing. All performance references is historical and is not guarantee of future results. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price. Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor's portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses. Investing in Real Estate Investment Trusts (REITS) involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained. Stock investing involves risk including loss of principal. Securities and financial planning offered through LPL Financial, Member FINRA/SIPC.