by Doug Drabik, Fixed Income Research, Raymond James
Doug Drabik discusses fixed income market conditions and offers insight for bond investors.
I’m going old school today, perhaps walking the thin line of coveting the comfort that comes with following the masses. Instant gratification is a desirable position to crave in any facet of life. Take a pill, lose 20 pounds. Skip the entry-level job and catapult to the executive position. Buy the desired new car with loans rather than wait to save up enough money. Short cut the earning process with at-the-moment investments based on the current market pulse rather than abide by long-term disciplined investing.
Absorbing sizeable chunks of information has never been easier and perhaps unavoidable than ever before. The number of media and social outlets increases the bombardment of information received – whether that information is factual or fictional, objective or subjective. So I’m going to apologize for bursting the instant gratification balloon as it pertains to the fixed income world. The division of asset classes is as real as the functionality of disciplined allocation. Some assets are designed to attempt to earn instant gratification. Typically the quicker that instant gratification is possible, the greater the associated risk. In other words, you might make a vast return when taking on greater risk but likely jeopardize losing significant money too. Many investors probably would prefer to leave the big opportunities and big risks to growth assets and let their fixed income perform more conservatively but assuredly.
Long term planning might require what my mother always classified as “selective hearing”. You know, when your kids or as a kid they/you would hear, “it’s time for dinner” but didn’t hear “it’s time to do your homework.” Fixed income selective hearing requires discipline. Fixed income for many investors, is not intended to time the market or create massive gains in principal that the market might provide by anticipating price movements. That’s what you hope for with stocks - the oversimplified buy low sell high mantra. With bonds it’s generally buy and hold because future price moves do not affect cash flow or income generated. A bond is “fixed” or locked in. These characteristics allow investors, barring default, to protect principal and to receive known income regardless of media noise or at-the-moment chatter. Fixed income selective hearing means long term planning and shutting out claims of a quick income pop available as a result of a current data release.
Of course hitting the lottery is always possible and dreams of instant gratification include exhilarating outcomes. Yet for most of us, a well thought out, long-term strategy, using individual bonds in a premeditated personalized approach will optimize a portfolio’s return. Buying the short inverted part of the curve may be another example of instant gratification versus long term benefit. Short is not necessarily conservative. It is a call on interest rates. An inverted curve is typically a signal for lower future interest rates. Locking in longer reduces reinvestment risk and over time, may provide a greater net return. Planning long term individual bond strategy may be old school and may lack instant gratification yet it may provide the most suitable option for many investors.
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The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.
Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value.
To learn more about the risks and rewards of investing in fixed income, access the Financial Industry Regulatory Authority’s website at finra.org/investors/learn-to-invest/types-investments/bonds and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) at emma.msrb.org.
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