Bonds

Ignoring the Global Market?

Imagine you can only invest in stocks of American companies that are west of the Mississippi River. Expand this example globally and you appreciate the narrow vision that many investors happily accept. You need a good slug of overseas exposure. How much? About 30% of your stock holdings. Here’s the thinking behind that.

How to Invest in Bonds Now

Bonds are a familiar asset to most investors. Maybe you’re one of the many who took advantage of the declining interest rates that fueled bond funds in the past few years. Rates always fluctuate, though, and our clients frequently ask, “What’s the best way to invest in bonds today?”

First, you need to know how bonds work. Your investment essentially lends money to a government or corporate entity that agrees to pay the investment back to you after a set time (the bond’s “maturity”) plus interest.

Decent Bond Yields: In 5 Years

Will interest rates ever return to a level where they provide a decent return? Sure, in about five years. In the meantime, that leaves fixed-income investors scrambling.

Many investors watch the daily close of major stock indexes as an indicator as to where market winds are blowing. It also pays to watch the direction of interest rates as a portent of trends. Interest rates are likely to remain constrained. For asset allocators, that bodes positives and negatives as they evaluate various asset classes.

The Fed’s Monetary Misfires

For decades, the Federal Reserve has manipulated the money supply, often in response to political concerns. The better policy would be for it to adjust monetary policy using a simple formula based on movements of inflation and economic growth.

Surprise Boon for Bondholders

The drop in interest rates this year is a surprise. But it is good for bondholders because bond prices are up and they have more time to get ready for the inevitable rate hikes.

Not that long ago, it was 2013 and expectations were different. While only five short months have passed, what a change of seasons we’ve had in the bond market.

ECB: All Talk, No Action

The European Central Bank keeps talking about the stimulus it will take to get the economically sluggish Continent moving again. Trouble is, it never follows up with action. All it does is talk about what it will do. Eventually, the ECB’s credibility will wear thin.

We’ve seen more activity in a tortoise than we’ve seen in Europe of late. Maybe Vladimir Putin needs to invade Europe just to see if the cultured continent is still functioning.

Market Signals Are Bearish

Several market signals point in a bearish direction lately. Lower Treasury yields, slumps in consumer discretionary, homebuilding and Chinese stocks, and higher expected market volatility are disquieting.

2 Problems for the Market

While the Standard & Poor’s 500 index has been in record territory for about a year, two warning signs suggest trouble ahead: a divergence between small and large stocks, and between consumer discretionary and consumer staples stocks. Should you be concerned?  

Beware of Fixed-Income Risks

As you sketch out your retirement income plan, you often hear that stocks are risky and fixed-income instruments, like bonds and certificates of deposit, are safe. That simplistic formulation ignores how devastating inflation is on fixed income.

The Impact of Rising Rates

At some point, interest rates will climb again. But that day keeps getting pushed into the future. When it does come, how will your bond and stock holdings fare? Some history may help give an answer.

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