DWM Seminar Recap

Bond Interest Rate Graph
(Click above for full size image)

We just wrapped up our fall seminar series and based upon feedback it was a great success. Both venues – the Wolfe St Playhouse in Charleston and Emmett’s Brewery in Palatine – served as Graphgreat places to not only deliver an important financial presentation but also as a great place to just hang out and visit with one another.

In case you missed one of the October seminars entitled “Rising Interest Rates: Should I Be Concerned?“, here is a quick recap of what you missed:

The Bond bull market may be over.

  1. The last 3 decades saw declining interest rates. Because of the inverse relationship between rates and bond prices, this created a nice tailwind for bond prices.
  2. With interest rates recently bouncing off historic lows and expected to gradually increase as the Fed tinkers with tapering their Quantitative Easing Program, these tailwinds are becoming headwinds.
  3. This doesn’t mean that bonds will necessarily have negative returns but expected returns should be significantly lower than the 8.5+% returns they have exhibited since September of 1980 when 10-Year Treasury rates peaked at 15.8%.

Bonds still play a vital role within an overall portfolio as do all of the asset classes.

  1. As a diversifier which creates lower volatility to the overall portfolio- bonds not only have smaller corrections than equities but have consistently held up during equity market corrections.
  2. As a capital preservationalist.
  3. As an income provider.

Traditional and major index (like Barclays Aggregate) bond funds may not be the best way to go.  Make sure to ‘get under the hood’ of your bond portfolio and ‘check the fluids’.

  1. Duration (essentially the amount of time until a bond matures) – the bigger the duration, the more sensitivity the bond price will change. Because of this, consider reducing the overall duration of your bond portfolio.
  2. Consider adding floating rate exposure – one of the few subsectors within bond land that enjoys a rising interest rate environment given that they rely upon loans that reset in periods usually less than a year at the new current interest rate environment.
  3. High Yields – with default rates near historical lows, these securities can enhance an overall bond portfolio.
  4. Look to areas outside of the US – international developed and emerging bond markets can provide diversification and enhanced yields/returns.
  5.  Utilizing low cost ETFs and mutual funds for the above exposure helps eliminate company-specific risk.

Use of multiple asset classes lead to non-correlation benefits that ultimately lead to better long-term results.

  1. Non-correlation leads to a tighter range of outcomes for the overall portfolio
  2. Tighter range of outcomes puts a smoothing effect on your return profile
  3. Smoothing effect leads to smaller downsides
  4. Smaller downsides lead to better geometric compounding
  5. Better geometric compounding leads to BETTER LONG-TERM RESULTS
  6. Note: Investor psychology studies and personal experience remind us that not everyone is a fan of non-correlation when stocks are roaring, but the fact is one cannot count on 20%+ stock returns year in and year out. Not to mention that the 30yr+ bond bull market may be over.  One must look elsewhere for proper diversification, for real positive returns and for protection to the portfolio.
  • The world has changed…and will keep changing.
  • Don’t try to control the things you cannot, but take advantage of the things you can control.
  • The markets cannot be controlled, but Asset Allocation can be. Asset allocation is the primary driver of returns.
  • Make sure you are prepared for a rising interest rate environment or whatever environment is thrown your way by working with a wealth management professional firm like DWM.