Traditional investment thinking has always viewed bonds and fixed income as a “safe” haven away from the volatility of equities.  Equities, as we’ve discussed before, are thousands of companies (of various sizes) run by really smart men and women.  These companies are in the business of generating profits and are held accountable by a board of directors.  Some investors seek particular companies, industries or locations in which they invest.  At Flowerstone Financial, we’re agnostic about selecting individual companies and would rather own the entire equity market.  We accomplish this via efficient and inexpensive exchange traded funds.  This provides broad exposure to all companies (size, geography, industry) based on stated percentages without becoming a market timer or fortune teller.  All of these investments are guided by a written investment policy statement, and most importantly, a customized financial plan to meet your needs.

Today’s investors, for the most part, are a very well-educated bunch – most having survived the financial crisis of twelve years ago.  This is evidenced by all the reporting by major mutual fund companies on the behavior of individual investors in the extremely volatile months of March and April 2020.  Many have recently reported very little equity liquidations taking place from individual investor accounts during this time frame.  In fact, some large mutual fund companies reported increased equity ownership from incoming monies as prices fell.  This is constant with what we experienced as we assisted families and professionals with additional investments from excess cash.  Everyone likes to talk about buying low (when markets contract in value) to take advantage of lower prices.  It’s completely different to have the guts and vision to do so without worry and concern on the outcome of your decision.  Unfortunately, it seems institutional clients were not that disciplined as there was more selling taking place for a variety of reasons.  A lot of lessons have been learned from the 2008 financial crisis and that has served individual investors well up to this point.

Think about the role fixed income plays in your plan and your investments today and into the future?  Current rates on the 10-year US Treasury are .70 percent +/-!  Stretch-out the fixed income period and 30-year US Treasury bonds are yielding 1.50% +/-!  These yields change for a variety of reasons but have been horrifically low for an extended period of time (think decades).  Yet, most investors have a large percentage of their portfolio in some level of fixed income.  Why?  What’s so alluring to have a large portion of your portfolio in an investment that can’t keep pace with the rising cost of life?  There was a time when fixed income was yielding significantly more and added stability to the up and down prices of equities.  It’s been a long time since we’ve seen this, yet so many investors seem stuck in the past with their approach and ownership of fixed income.  We’ve covered the inefficiency of attempting to squeeze rate of return out of your fixed income investments on prior posts.  Often, it’s best to simply park monies in cash, it’s a return of your money that most investors should seek.

We’ve also covered and discussed the inefficiencies of target date funds.  Slowly, over time, a large percentage of fixed income and cash investments accumulate by liquidating equities as the investor approaches a particular year.  Current data from 401k custodians supports an overwhelming majority of retirement plan participants selecting target date funds as the sole investment in their account.  They likely believe they are preparing themselves for a robust retirement income.  Unfortunately, they will be blindsided in their 80s and 90s when they have lived longer than they ever anticipated and have burned through all their investments.  Fixed income and current low yields simply can’t keep pace with rising costs.  They thought volatility was the monster they were fighting when in fact it is and always will be purchasing power.

Keeping your money relevant so you may live, give, save, and spend your way through multiple decades is the cornerstone to a solid financial plan.  Have you taken a look at your portfolio lately?  Many haven’t as it was too painful to see contracted values the past several months.  Now is the time to sign on, reflect, and take a look at where things stand.  Yes, values are still down from their February 2020 highs, that’s to be expected.  Are you happy with what you see?  Do your investments and percentages align with your priorities and timing?  A properly allocated portfolio should be held accountable by your written plan.  Together this increases your probably of success long term.


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