blog post 7/28/2016

In a Fixed Income Fix

We are taught that an investment portfolio should have balance. Balance comes, in large measure, through diversification. In simple terms, we should not put all our eggs in one basket or all our baskets on one truck. Simple! Well, maybe.

One rule of thumb for diversification of an investment portfolio has to do with a person’s age. The point of this rule is to determine the mix, or the relation if you will, of equities and fixed income instruments like bonds.

The rule works like this: Take 100 and subtract your age. The remainder is the maximum percentage of your portfolio you should have in equities. Now, remember, this is a kind of rough guide to creating a fixed income/equity mix in your investment holdings. I also want to mention that it is not my rule, but I believe it is a reasonable general guideline.

If you are 30 years old, the maximum amount this rule of thumb dictates for investment in equities is 70% of your portfolio. I want to emphasize that 70% is the maximum, not the recommended amount. In fact, based on circumstances, it might be appropriate to invest considerably less into equities depending on factors specific to you, as well as the existent economic climate at the time you are making your investments.

Now, let’s flip this around. Please forgive me because I’m going to be repetitive.

If you are 70 years old, the maximum amount this rule of thumb dictates for investment in equities is 30% of your portfolio. I want to emphasize that 30% is the maximum, not the recommended amount according to this guideline. Once again I will state that, based on your given circumstances, it might be appropriate to invest considerably less into equities depending on factors specific to you, as well as the existent economic climate at the time you are making your investments.

When we look at this rule of thumb, in action, it becomes clear that it tells us that the older we get, the more our investments should be in what are considered relatively safer investment vehicles. This is owing to the fact that the older we are, the greater the likelihood we are approaching retirement, or are retired, and will likely have to rely, at least in part, on our investments as a source of income.

So far everything seems pretty reasonable, right? Nothing revolutionary here. However, what about the kind of investment climate we are in now? We are experiencing, in my opinion, a time of anemic rates of return in fixed income investments like U.S. government bonds.

Recently, it was announced that the German government was actually setting a negative rate of return on its bonds. This means if you were to purchase one of these bonds from the German government and hold it to maturity, you will get back less money than you invested in it. That is not an appealing prospect.

Oh, but I live in the United States, not Germany you say. Okay, I agree. However, we do live in an era of financial interconnectivity, of globalization. But let’s put that aside.

Let’s look at what United States Treasury Bonds are currently doing. What becomes clear is that, unlike Germany, our government is not currently issuing bonds with a stated or nominal negative rate of return. However, if the amount the government is paying on the bonds is less than the rate of inflation, then it is a negative real rate of return.

As of today, July 25th, 2016 the ten year U.S. Treasury Bond was yielding 1.57%. On July 15th, 2016, the U.S. government published the latest inflation rate as 1.0% through the 12 months ended June 2016. Now, do the math. 1.57% -1.0% = .57%. So that is not a negative rate of return. You are earning a bit more than one half of one percent on your hard earned money. That does not take taxes into consideration.

We are in a fixed income fix folks. These are tough times to buy and hold bonds and make significant money. And yes, U.S. government bonds are not the only game in town. There are municipal bonds, corporate bonds, etc. However, look at the rates there. Consider the safety, or lack thereof, of the investments with the more palatable rates of return and you might not want to do a happy dance.

What to do?

Well, back to that rule of thumb I mentioned earlier. I believe in portfolio diversification. And I believe that as we age more money should be deployed into safer investment vehicles. So I am certainly not suggesting ignoring this rule of thumb.

Yet, what if there were other vehicles, vehicles that could act as fixed income investments and give us added benefits?

One class of financial vehicles I have written about previously fall into a category of what are sometimes called uncorrelated assets. And I believe, depending on age, income, goals, years from retirement and a myriad of other factors, that a vehicle in this category might help a good number of us out of this fixed income fix we are in.

If we speak, ask me about it. Or, contact a trusted investment advisor for some insight.

Remember, your financial future is in your hands. Get more information now. Wealth building does not take care of itself.

Scott McGimpsey July 28th, 2016

This material was prepared by Scott McGimpsey and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources, however, we make no representation as to its completeness or accuracy. Neither Summit Brokerage Services Inc. nor Scott McGimpsey is engaged in rendering legal, accounting, or other professionally services. If such assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any federal, state, or municipal tax penalty. Moreover, a diversified portfolio does not assure a profit or assure protection against loss in a declining market. UNIFIED PLANNING GROUP is an independent firm with securities offered through Summit Brokerage Services Inc., Member FINRA, SIPC