With the DOW now having intra-day moves of 1,000+ points based mostly on Coronavirus fears, this is a great time for investors to give increased thought to their investment holdings and market-based portfolios.
And although most of the headlines are about the US and other major STOCK markets, in many ways, a bigger concern to me is the BOND market. Yes… bonds!
Today, the 10-year US Treasury bond went down to a yield of .97%. That’s under 1%! WOW.
When yields go down, holders of most bonds get price increases (appreciation). But when bond yields go back to normal levels (or even the un-normal low levels of the past 6-24 months), the value of those bonds are going to go down. That’s why I personally don’t like bonds in this environment. I personally prefer the principal-protected bucket that I write about in my books.
More on that point at the end of the blogpost. But let’s offer some good advice about thinking of your investments when we’re experiencing such high volatility and risks are elevated.
Ben Carlson, CFA (Chartered Financial Analyst) recently wrote the following on his investment blog (I couldn’t have written it better):
“When stock market volatility erupts, investors are always in search of their own illusion of control. We crave predictability and control when it comes to our money but the stock market provides neither.
When stocks are rising, investing is often boring, methodical and the opposite of newsworthy. When stocks are falling, investing is often exciting fast, and scary.
Investors often look to find some modicum of control through the answers of gurus. We just want someone to tell us what’s going to happen next so we can either buy or sell to relieve the fear and anxiety. In all my years of doing this, I’ve never come across a single person who has all of the answers. That person doesn’t exist.
When stocks go down in a big way I find it’s more helpful to seek out the right questions as opposed to trying to find all of the answers.
Here are some questions you can ask yourself when trying to work through how to handle stock market volatility:
- If I sell my stocks now what is the plan for getting back in?
- Has my time horizon, risk profile or circumstances meaningfully changed enough to warrant a portfolio change?
- Will my lifestyle be impacted in a meaningful way if stocks continue to fall?
- Did I build my portfolio with the understanding that stocks can and will fall on occasion?
- Have I underestimated my appetite for risk assets?
- Do I need to use the money I have invested in stocks for spending purposes in the next 3-5 years?
- Does my portfolio match my willingness, need, and ability to take risk?
- Do I fully understand the potential range of outcomes when investing in stocks?
- Is my portfolio durable and diversified enough to withstand severe dislocations in the stock market?
- Does my investment strategy fit with my personality?
- How did I react to market carnage in the past?
- How much volatility am I willing to accept in order to earn higher expected returns over time?
- What are my core investment beliefs?
- What do I own and why do I own it?
- What will cause me to buy or sell securities, funds, or asset classes in my portfolio?
There are no right or wrong answers here because it all depends on your circumstances.
These questions work in every market environment but more so when volatility rears its ugly head because that’s when we want to take the wheel to make something happen to give us the illusion of control. Most of this stuff boils down to having a comprehensive investment plan in place to guide your actions and set realistic expectations.
But the act of creating an investment plan is the easy part. The hard part is implementing that plan during periods of heightened stress in the financial markets or your own personal life. Even the most rock-solid of investment plans won’t give you the same illusion of control as your favorite talking head who pretends to know what’s going to happen next in the stock market.
What happens next in the market is completely out of our hands which is why the most important reason for creating an investment plan is that it forces you to focus on what you can control.”
Well written Ben! And I hope those questions will provoke your own thinking about your portfolio.
Again, stocks for the long-term make sense for almost every investor. However, I believe that many investors should re-think having a majority of their “fixed-income” allocation invested in bonds for the long-term.
Wade Pfau, Ph.D., CFA, RICP has written extensively about these bond alternatives in his industry articles and consumer books – including his excellent “Safety-First Retirement Planning” book.
Depending upon your own answers, some of my clients would be better off (and endure much less stress) by moving some of their bond allocation to the principal-protected bucket. This bucket would include the following:
Money Market funds and CDs – very liquid accounts albeit interest rates are lower than inflation now.
Fixed Annuities – similar to 5-year CDs with guaranteed interest rates of about 2%-3% plus tax-deferral (no annual 1099s on interest). NO fees.
Fixed Indexed Annuities (FIA) – ZERO principal losses as a floor with some market participation when the market goes up. No annual 1099s on interest. Normally NO fees. Can be built for straight accumulation or for future guaranteed lifetime income. I write about FIAs in my “Retirement Income Planning” book.
Whole Life insurance – Tax-deferred growth accumulation. No annual 1099s on interest. Guaranteed interest rates of 3.5% plus potential dividends Can be built for tax-free distributions (when properly structured) with tax-free death benefits.
Indexed Universal Life (IUL) – Tax-deferred growth accumulation. No annual 1099s on interest. Same ZERO principal losses as a floor as an FIA with very good market participation when the market goes up. And same characteristics as whole life but with much greater growth potential and TAX-FREE distributions in retirement (and larger death benefits).
Some IULs, when used for a CD/bond replacement, have 0% loads and 0% surrender charges which can give good access to your capital should an emergency come up, an attractive Death Benefit and potential LTC usage.
I write about IULs as a ROTH supplement in my “Get Me to ZERO” book.
None of the above principal-protected products are perfect. The cons of any of them are either low rates, less liquidity or health qualifying. But they each have their positive points when compared to a BOND portfolio. Only the IUL has the opportunity to not only beat a bond portfolio but compete with the longer-term returns of the STOCK market (with no market risk/volatility).
So ask yourself the questions above as they relate to both the stock market and the bond market and if you’d like to learn more about adjusting your portfolio, let me know.
I can help you sort it all out and make the best decisions for your situation… Mark