Happy New Year! When we look back at the year that was 2019, one of the recurring headlines in the financial world was centered around the Federal Reserve’s monetary policy. Specifically, the cutting of interest rates which the Fed did three times last year. The main reason a central bank cuts rates is to encourage economic activity. It is essentially trying to make conservative investments like bonds and CDs less desirable and to make riskier assets like equities relatively more attractive. Capital investment is a key component to economic growth and lower interest rates can sometimes act as a stimulant. In fact, it is often said that stocks like it when the Fed cuts rates.
Allocations for most people in or around retirement should have a healthy mix of bonds and other income producing investments. The classic moderate portfolio will usually consist of 60% stocks and 40% bonds. But the income that is derived from bonds and CDs is directly influenced by current interest rates which have been historically low for some time now. Therefore, the yields on conservative investments are also, consequently historically low. If you are a conservative investor, it has never been harder to make money with a portfolio that is most appropriate for you.
Because traditional conservative investments have had such low yields, investors have been looking elsewhere for income. Over the last 10 years Real Estate Investment Trusts (REITs) have performed extremely well in part because of the attractive income they produce. Preferred stocks and high yield bonds have also done well because of this hunt for yield. While these investments do provide an attractive level of income, they carry risk that investors sometimes forget about. You can think of high yielding fixed income investments as stocks incognito.
Now may be a good time to take a look at your risk exposure in your portfolio. This is true not only because of the challenging fixed income market but in large part as well to the business cycle. The S&P 500 and Dow Jones have been in arguably the longest bull market on record (that’s about 150 years). Over the last 12 months the largest publicly traded company in the country, Apple, has returned more than 85%! Certainly very few would suggest that we are at the beginning of an economic expansion. It is now more important than ever to review your portfolio allocation with your advisor. You need only to take on a certain amount of risk to achieve your goals, why pursue more?