With interest rates at all time lows and the 10 year treasury hovering around 1.8% people are beginning to doubt the safety of what Fixed Income has to offer. Is there truth to this? Or is it a feeling brought on by media with little validation to back it up? Could it be our emotions getting the best of us? All good questions and many are searching for answers. It’s no secret that yields are low, cities are declaring bankruptcy and the equity markets are soaring. But does this mean we should forget Fixed Income all together? Every day I get the question or concern from my clients, “Isn’t it too risky to be buying bonds in this interest rate environment?” This is the high cost of waiting.
I decided to sit down with Matt Dalton, Portfolio Manager and CEO of Belle Haven Investments to get a better understanding of exactly what Fixed Income has to offer today, and to address the greater concern of “The High Cost of Waiting”. Belle Haven Investments is a Municipal Bond Specialist, located in White Plains, NY and oversees $900 million of assets under management.
I (JJ) asked Matt (MD) to give me his overall feeling about those clients that are choosing money markets as an alternative to investing in Fixed Income
“Not being invested has proven costly for thousands of investors sitting in money market funds or other cash alternatives. Timing interest rate moves is a very hard thing to do. Investing with a plan and utilizing a defensive strategy such as a ladder allows one to earn income on that cash while understanding the risk. Our biggest concern is that investors really don’t seem to understand the risk. Should they, we believe they would invest in a defensive Fixed Income strategy.”
JJ- What about those who say the following: “I have no intention of investing in bonds while the equity markets are doing so well.”
MD- Diversification. One should never be all one or the other.
JJ- What do you say to clients sitting in cash waiting for interest rates to rise?
MD- Many investors have been and continue to prefer sitting in cash as apposed to investing in Fixed Income due to the fear of rising interest rates. We can’t help to wonder if the herd mentality has set in and investors are not thinking clearly about the many options available for their money to make money within the fixed income space.
When the media and or investors speak about bonds they generally without conciseness are speaking about long-term commitments. Many other options are available for investors to earn some income on their money with out the risk that the media would have them believe they are taking.
With good advice and oversight your money does not have to sit in cash earning nothing.
JJ- What is your biggest fear or greatest caution when it comes to clients that are investing in Fixed Income themselves?
MD- The perception and/or understanding of risk is the biggest fear we have with investors. Risk with Fixed Income can come from several different sources; however, credit worthiness and interest rate risk are two of the main sources of risk. In today’s complex market we encourage investors to get qualified advice.
JJ– What do you say to investors chasing yield in today’s environment?
MB- Don’t. The yield sector is very crowded. Should we re-enter a recessionary period, interest rates rising will be subordinate to the fear of default.
JJ- What is the risk associated in bond funds rather than individual bonds?
MD- Maturity. Individual bonds have one, bond funds don’t.
If and when interest rates rise, the differences between owning a bond with a maturity date versus a perpetual maturity bond fund will become apparent.
JJ- “I only pay a one-time fee when purchasing my bonds, I can’t justify paying an annual fee year after year.” What is your response?
MD- We hear this line from time to time. Unfortunately, it’s just not true. When one buys a bond and pays a markup, that markup in price reduces the yield one will earn on that investment. That reduction in yield is for the life of the bond.When I hear that line I think about those elixir salesmen I always see in the old westerns. Run the math.
Attached you will find a chart that puts a value to the true “high cost of waiting”. Individual client concerns may vary depending on income needs, time horizon and risk tolerance. We suggest that you meet with your advisor and discuss the goals you have set forth for the assets in your portfolio designed for low risk. Discuss your options and figure out what your true value is in “The High Cost of Waiting.”
~ Julie Johnson, Vice President
Special thanks to Matt Dalton and Belle Haven Investments.
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