Doug Drabik discusses fixed-income market conditions and offers insight for bond investors.
I’m going old school today, perhaps walking the thin line of coveting the comfort that comes with following the masses. Instant gratification is a desirable position to crave in any facet of life. Take a pill, and lose 20 pounds. Skip the entry-level job and catapult to the executive position. Buy the desired new car with loans rather than wait to save up enough money. Short-cut the earning process with at-the-moment investments based on the current market pulse rather than abide by long-term disciplined investing.
Absorbing sizeable chunks of information has never been easier and perhaps unavoidable than ever before. The number of media and social outlets increases the bombardment of information received – whether that information is factual or fictional, objective or subjective. So I’m going to apologize for bursting the instant gratification balloon as it pertains to the fixed-income world. The division of asset classes is as real as the functionality of disciplined allocation. Some assets are designed to attempt to earn instant gratification. Typically the quicker that instant gratification is possible, the greater the associated risk. In other words, you might make a vast return when taking on greater risk but likely jeopardize losing significant money too. Many investors probably would prefer to leave the big opportunities and big risks to growth assets and let their fixed income perform more conservatively but assuredly.
Long-term planning might require what my mother always classified as “selective hearing”. You know, when your kids or as a kid they/you would hear, “It’s time for dinner” but didn’t hear “It’s time to do your homework.” Fixed income selective hearing requires discipline. Fixed income for many investors, is not intended to time the market or create massive gains in principal that the market might provide by anticipating price movements. That’s what you hope for with stocks - the oversimplified buy low sell high mantra. With bonds, it’s generally bought and held because future price moves do not affect cash flow or income generated. A bond is “fixed” or locked in. These characteristics allow investors, barring default, to protect the principal and to receive known income regardless of media noise or at-the-moment chatter. Fixed income selective hearing means long-term planning and shutting out claims of a quick income pop available as a result of a current data release.
Of course, hitting the lottery is always possible and dreams of instant gratification include exhilarating outcomes. Yet for most of us, a well-thought-out, long-term strategy, using individual bonds in a premeditated personalized approach will optimize a portfolio’s return. Buying the short inverted part of the curve may be another example of instant gratification versus long-term benefit. Short is not necessarily conservative. It is a call on interest rates. An inverted curve is typically a signal for lower future interest rates. Locking in longer reduces reinvestment risk and over time, may provide a greater net return. Planning long-term individual bond strategy may be old school and may lack instant gratification yet it may provide the most suitable option for many investors.
