LPL Financial Managing Director and Chief Investment Officer, Burt White, stated something along these lines . . . in 2013, we need to buy bonds like we’re buying stocks, and buy stocks like we’re buying bonds. Now that may sound confusing and even contradictory, but listen to his “madness”.
Growth Opportunities in the Fixed Income Arena
When weighing the potential and opportunity of the two, you have many factors to consider. However, the point being, stocks were considered to be more risky, but provided growth, not income. Bonds are not design for growth, but provides income and safety in portfolios. For now, we need to flip that. We need to allow stocks to provide income (through dividends). Even though the yields are at all time lows, we need to search for growth opportunities in the fixed income arena. Getting coupons from bond rates that can’t outpace inflation will not meet your goals.
As of the writing of this blog, the 10-year treasury is currently yielding 1.92%. Did you get that? Somebody, and there seems to be a lot of them, are taking their hard-earned money and investing into this investment only to yield 1.92% every year for the next 10 years. So $100,000 generates just $1920 of interest per year. Forget about compounding interest for now, but that’s just $19,200 over the next 10 years. And investors are raising their hands saying, I want one, I want one of those bonds. That doesn’t appear to be an investment that will provide the retirement income that folks are expecting in their golden years. However, they lay their head on the pillow every night knowing that next year, they get another $1920 on their hundred grand investment.
Meanwhile, as of this writing, the S&P 500 is currently yielding a dividend of 2.13%. Yes, that’s right, it’s higher than the yield on a 10-year treasury bond!
I guess what we’re saying is that when buying stocks, we like stable solid companies that are paying consistent dividends. Being more conservative with your stock purchases can keep volatility down, and provide predictable income.
Settle for 1.92% for the next 10 years?
On the other hand, we are looking for something completely different with our bond and bond fund purchases. We can’t settle for 1.92% for the next 10 years? In many cases, we’re looking for opportunities in “alternative investments”. To learn more about that, check out next weeks blog posted on Monday.