Yield Hunters Have Three Options
The traditional “60/40” portfolio of stocks and bonds can be saved with a few modest tweaks
Bloomberg, November 16, 2020
One of the most challenging issues facing investors today is the impact of ZIRP on the fixed income part of their portfolios. In today’s column, I wanted to accomplish two things: First, provide a framework for thinking about low rates impact traditional portfolios. Second, offer a discussion of various options, and how much risk each entails.
The broader framework, which our investment committee (and in particular, Michael Batnick) have been discussing, include three broad issues. You can either: accept more risk, lower your return expectations, and/or embrace low rates as reality. Indeed, you can do any or all of these.
What are the options each of these present? I discuss seven, each with various impacts on returns, volatility and risk levels:
–Buy High grade corporate bonds
–Look into Preferred equity
–Increase equity allocation
–Build a bond ladder
–Buy Municipal bonds
–Consider Treasury Inflation-Protected Securities (TIPS)
-Shorten your duration
Some of these I like more than others, and some I outright dislike. But having the discussion is a very useful approach to considering what you should or should not do, as well as the impact on risk and volatility within your portfolio.
The key observation: There is no magic bullet, and reaching for yield usually leads to disaster.