Judging by what’s happening in the bond market, it appears
that some investors are more concerned about the return of their money than the return on
their money.
When investors get nervous about the stock market, you often
see money flow into the government securities of perceived safe haven countries
such as Germany, Japan, U.K., and the U.S. This increased demand helps drive
down the yield on their bonds. In fact, take a look at the following chart to
see some amazingly low government securities yields:
|
Country
|
Maturity
|
Annual
Yield
|
|
Germany
|
2 Years
|
0.07%
|
|
Japan
|
10 Years
|
0.89
|
|
Germany
|
10 Years
|
1.41
|
|
Finland
|
10 Years
|
1.73
|
|
U.S.
|
10 Years
|
1.74
|
|
U.K.
|
10 Years
|
1.79
|
|
Netherlands
|
10 Years
|
1.89
|
Sources: The Wall Street
Journal, May 23, 2012; and The Wall
Street Journal, May 25, 2012
By contrast, yields on government securities in perceived
“risky” countries such as Italy (10-year yield of 5.76 percent) and Spain
(10-year yield of 6.10 percent) are much higher, according to The Wall Street Journal.
Unfortunately, even the government securities of the “safe”
countries may experience a loss in “purchasing power.” For example, with
inflation running at 2.3 percent in the U.S. for the 12 months ending in April,
investors in 10-year U.S. government securities may lose purchasing power since
the yield is less than the inflation rate, according to the Bureau of Labor
Statistics. On top of that, if interest rates rise over time, the bonds could
experience a capital loss as the price of the bond adjusts to reflect current
interest rates.
So, what should an investor do to try and stay ahead of
inflation and grow their portfolio without taking inappropriate risk? Here are
three things:
1.
Know your comfort level.
We work with you to figure out what level of market fluctuation is acceptable to
you.
2.
Diversify your portfolio.
We try to diversify by asset class and time horizon based on your acceptable
level of fluctuation. While this does not protect against a loss, it may help
smooth out the ride.
3.
Monitor your portfolio.
We keep tabs on what’s happening in the economy and in your portfolio so we can
be proactive in making changes when necessary.
Our goal is to help you receive “a return of and a return on” your money.
IF THE WORLD WAS A LAUNDROMAT, the U.S. might be the “cleanest dirty shirt” in the store. As new signs point to a global slowdown, we’re on the lookout for countries that might hold up better in the rinse cycle and the U.S. could be that country, according to U.S. News & World Report.
The “cleanest dirty shirt” analogy comes from Mohamed El-Arian of PIMCO
who says, “When you're on a business trip that gets extended and you don't have
any more clean shirts, you wear the one that's least dirty.” In our case, you
invest in the country that’s “least bad.”
“Least bad” may not sound like a great way to invest, but consider this.
With the U.S. fiscal situation in horrible shape, you might expect investors to
shun the U.S. dollar on fear the government will print dollars and reduce its
value. Well, recently, investors have been clamoring to buy dollars. For
example, last week, “The ICE dollar index, which measures the U.S. unit against
a basket of major currencies, rose to 82.416 – its highest level since 2010,”
according to MarketWatch.
In the dollar’s case, nobody is suggesting that, in isolation, it looks
great. Rather, when you compare it to another currency such as the euro – which
represents 17 countries in Europe – it looks relatively better because Europe’s
problems seem more pressing than ours.
Just like taking a dirty shirt to the Laundromat to get it cleaned,
investments over time may turn from “dirty” to “clean” as problems get worked
out and situations improve. There’s money to be made during this cleansing cycle
and we’re doing our best to “clean up.”
Weekly Focus – Did You Know…
The average life expectancy at birth in the United States for the
population in general is 78.37 years. For males, the average life expectancy is
75.92 years and for females it’s 80.93 years (2011 estimate). This places the
U.S. at #50 in the world and well behind #1 Monaco at 89.73 years.
Sources:
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