Critical Update and Strategy Alert
The last few months have been extremely difficult for investors, and certainly some of the toughest I’ve seen in my 28 years in this business. Since Ben Bernanke’s now famous speech where he first uttered the dangerous words of tapering the stimulus, we have experienced one of the strongest and most volatile periods since the “Great Recession” officially ended in July 2009.
Of course if you are just looking at the stock market, you are wondering what all the fuss is about. The true story lies beneath the surface.
For the last 6 years, the Fed’s QE programs have kept the economy on life support. We are now on QE3, which has the Fed buying back $85 billion worth of US treasuries and US agency bonds per month. The intention of the Fed’s action is to keep overall interest rates low, and as a by-product, bonds have benefited nicely because interest rates have fallen over the past several years. This has allowed bonds to provide returns above the amount of interest income they annually produce.
Bernanke’s speech was a shot across the bow for investors, warning that the Fed will soon end the stimulus programs. This has caused bonds to get crushed, making this the worst bond market performance since 1962, when JFK was president. In just a couple of months, the benchmark 10-year US Treasury bond has fallen over 60% as the yield has jumped from 1.60% to 2.70%. I know you have seen mortgage rates catapulting upwards; this in turn has caused practically every fixed income investment to follow suit. For investors, it is the first time in years that they have lost money in bonds!
This bond market crash is pulling down the performance of virtually every portfolio because most people are not high-risk. Most portfolios are blended and balanced, because of course no one in their right mind past the age of 29 would have 100% of their portfolio in stocks.
The problem lies in that most people have become accustomed to simply comparing their portfolio to the DOW or the S&P 500, which have done well. No one likes seeing personal returns unable to keep pace with the indexes, even though we know that there is no way we can bear that risk.
As we get closer to those golden years, the key is to get reasonable returns with less risk-to simply “Invest for need, not for greed™”. If only the damned news didn’t focus so much on stock market indexes, right?
So what is an investor to do, especially if we are planning for retirement, or already retired? Remove bonds completely from their portfolio? Bonds not only provide a source of income, but they usually help reduce volatility in a portfolio, which they will again once we are through this rough patch. If we do get away from bonds as a way to balance a portfolio, where do we go to moderate the risk? Gold, commodities, foreign markets, global currencies, US stocks?
I am writing this letter to simply let you know that we understand that with these changing times, we are faced with new challenges. We have been aggressive in repositioning portfolios accordingly, trying to get the best return for you with the least risk possible. I will continue to try to identify the trends for the next 1, 3, 5 and 10 years, and we will adjust as necessary.
Be sure to read my weekly newsletters regularly for my insights, forecasts, and strategy alerts and feel free to give me a call with any comments, questions, or concerns.
Thank you again for your trust, confidence, and friendship.
Warmest Regards -Keith
P.S. If you would like me to send my economic and market updates and alerts to someone, just let me know and we will give them a free subscription to my client newsletters. In addition, feel free to attend any of our upcoming workshops. The next one is Tuesday, July 23rd at 6 PM.