Over the past several months, clients have been asking a lot of questions relating to fixed income yields. Here is just a sample of what they’re asking:
- Why would I invest in bonds paying such low yields?
- Why would I rebalance and invest in such low yielding bonds, especially since I am getting a better dividend yield in my equities?
- Should I stay in cash for the short run until bond yields improve?
- How can I enhance my yield?
I always find myself coming back to the very fundamental investment theme of risk vs reward. In other words, clients should consider how much more risk they are willing to take on in pursuit of higher yields.
I think it is important not to lose sight of the role fixed income plays in a well-diversified portfolio. That role is to reduce risk and add stability. The current low yield environment is a very big enticement for investors to add risk as they chase yield. Adding risk to the fixed income portion of a portfolio essentially negates the reason for owning those assets in the first place. We continue to believe, especially in this volatile market, that clients are better served by sticking with a strategy that adds consistent yields, low risk and ongoing liquidity.
Currently, corporate bond yield spreads have fallen, putting them closer to their historical average. Purchasing perceived enhanced yield from corporate bonds does not make sense because you are not being rewarded for the additional risk. Additionally, individuals should be aware that any product offering additional yield is most likely manufacturing that yield in some way. It is important that investors know exactly what they are investing in because in today’s low rate environment, something that appears too good to be true, most likely is.
As Moneta clients know, we have a fundamental belief that bonds act as the firewall in your investment portfolio. We have very strict guidelines in purchasing fixed income, as we do not look at credit rating alone. We look at a combination of factors that include but are not limited to bond type and other credit enhancements such as state intercept programs, state constitutional law and/or insurance. We focus on General Obligation bonds and essential services bonds and avoid bonds that are affiliated with special assessment projects, industrial development or multi-family housing. While there are no guarantees, keeping a portion of your investments in “high quality” fixed income reduces your risks and, historically, has helped to support investment portfolios during periods of market decline.