You are trying to assemble a crib. It’s a nice crib with all the looks and functionality expected. You’re also handed assembly instructions, only to find that they are for assembling a table and chairs. There’s nothing wrong with the instructions, nor is there anything wrong with the crib. They’re just not the proper match to get your crib functioning appropriately.
A significant amount of public financial information is disseminated, but knowing the intended audience is crucial before digesting its content. The volume of Armageddon-like articles seems to be on the rise, and the general underlying assumption often implies that all investors are thinking tactically 100% of the time. Tactical investing is aligned with a trader’s investing mentality. Timing the market is crucial, and outperforming an index is often the goal. Constant price observance and accurate predictions about the future will hopefully enable the skilled participant to outperform the averages by actively buying and selling at the right time.
The truth is that many investors utilize fixed income (bonds) as a ballast for their portfolio, primarily to protect their wealth (strategic use, not tactical plays). This typically means that they are holding investments to maturity. A recent article highlighting a well-known and successful financial pundit mentioned that in September 1994, a significant portion of the bond value was lost due to market movements. What they should have said is that a substantial amount of paper value was lost. Those who continued to hold bonds saw no disruptions. Bonds continue to pay the same interest and provide the same cash flow despite interim price changes. Only a default or the sale of the bond disrupts this process. Since most Raymond James investors utilize high-quality investment-grade credits, defaults are unlikely. Selling ahead of maturity is controlled by the investor. This highlights the difference between strategic and tactical investing. These economic phenomena create a challenging environment for profitable tactical trading yet have no discernible impact on strategic investors who hold individual bonds to maturity as part of their long-term strategy.
When articles quote strategy from well-known, successful financial minds, it is natural to cling to their advice with the assumption that mimicking their behavior sets you on an equally prosperous path. However, persons of great financial wealth can withstand losses and pullbacks that can make an average person bankrupt well before reaping the benefits of a tactical financial move. They often address trading strategies, which can differ significantly from long-term strategic portfolio positioning. What they are saying is likely sound and appropriate, but for a particular audience. In essence, they may be the wrong instructions for the fixed income allocation that best suits your long-term strategic goals.
