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The Fixed Income crash is reaching biblical proportions. What to do about it.
If you have a large chunk of your portfolio (or that of your clients) invested in bonds, the end of last week was indeed a “Good Friday.” That’s because the bond market was closed, so you couldn’t lose any more of the money you may never have expected to lose in the first place. You see, sometimes, in this crazy modern investing world, where cryptos and NFTs and meme stocks and Elon Musk continue on as if the party will never end, the inevitable has actually occurred inthe bond market: near-zero rates, a Fed with no way out, and investors who still think bonds work like they used to, finally conspired to crack the fixed income market.
Some of us have been pointing out the risks for years. But risk does not equal “will happen right now.” Risk is about what could happen. And risk-management is about preventing the worst outcomes. There was a lot of risk to manage in regard to how investors use bonds as part of an overall asset allocation plan. In Sungarden’s world, bonds have been largely absent from our model portfolios for the better part of a decade, a period during which the 10-year US Treasury rarely crossed above 3%. To us, bonds are past tense. They have been reduced to trading tools via ETFs, during the brief periods where the secular rise in interest rates takes a break. And as for Corporate and High Yield Bonds, be they in longer-term form or in Bank Loans, Preferred Stocks and the like: it’s the same answer from us. Bond investing is, as one market commentator recently put it, “return-free risk.”
This past weekend, I was sharing the annual Passover Seder meals with my friends and family, recounting the story of how the Jewish nation was set free from bondage at the hands of the ancient Egyptians. I pondered that biblical miracle (see the movie “The Ten Commandments” for the parting of the Red Sea, the 10 Plagues and more on that). Somewhere between the 3rd and 4th cups of wine (as my friend noted, it’s written right into the Passover story, so it’s basically a commandment!), I started staring at the word used to describe the hardships they suffered: bondage.
Naturally, I had to translate this to my native language: investing. As it turns out, we investors and financial advisors have had our own bond-age. It was the 40 years from about 1980-2020, when interest rates on US Treasury Bonds went from the teens to about zero. This screwed up everything for folks in retirement, and especially for those planning to retire in the foreseeable future.
But we can’t control what happens to the bond market. We CAN control what we do to adapt. Instead of trying to flock to the many “golden calf” investments that purport to be “bond substitutes,” here is the bottom-line about delivering yourself from the bond-age:
- Embrace tactical management. The markets move at a greatly increased speed. That means renting more and owning less (i.e. shorter holding periods). And if you think that produces “tax-inefficient” returns, contact me and I’ll explain why that’s simply not the case.
- Expand your opportunity set. To replace what bonds used to do for investors, you can’t just add more to stocks, find other types of bonds, or hide in cash. You need to consider a wider variety of “offensive” and “defensive” investments. We find that ETFs offer that type of breadth, which is why we gravitate to those in our model portfolios.
- Listen to the market. Technical analysis used to be considered akin to voodoo. But today, so much money is invested according to price patterns, indexes, algorithms, and everything other than “fundamental value.” So, unless your time horizon is very, very long, the best way to stay in sync with reward and risk is to learn more about how charting works. I’m not talking about the stuff that some analysts make look like Egyptian hieroglyphics. It can be a lot simpler than the flashy chart-wielding salespeople would have you think.
The markets appear ready to remind us that not only is the bond-age over, the stock market is vulnerable too. That pairing has not hit us since most of us were either kids or not even around. It requires more than just thinking history will repeat itself. If you’re an advisor, it’s going to take some work. But the path to the proverbial land of milk and honey is there. Go after it.
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