Creating portfolio income to pay the bills while living the “American dream” in today’s low interest rate world has been a frustrating balancing act for many retirees since the Great Recession in 2009, especially given the positive health of the U.S. economy.
Last week, the 10-year Treasury yield fell to as low as 2.35%. It has been on a decline since last November when it peaked above 3.2. This continues the 30+ year trend of declining interest rates since the early 80’s when “The Gipper” was in the White House and homeowners were paying 18% on 30-year mortgage rates. As is usually the case, market trends bring good news and bad news.
The good news is that investors don’t appear to be over-reacting to recent bout of bond and stock market volatility (US markets down 4% so far in May) or the potential negative implications of a trade war upon which the Fed warned that tariffs imposed on Chinese imports were costing the average household $813 per year. The market has experienced larger swings in recent weeks, but they’ve been in both directions. Thousand-point swings in the US markets should not cause alarm, especially in the later-innings of a 10+ year business cycle.
This is in stark contrast to last year when declining rates and a flattening yield curve were sounding alarm bells among investors watching the US markets plunge almost 20% to correction territory fueled by the madness of the crowd and algorithms, combined.
It’s also good news that investors can take advantage of now marginally higher paying, longer duration investment grade bonds and tax-free municipals, with less apprehension over losing principal from rising rates (duration risk) in the current market environment.
As an added plus, longer duration bonds with higher dividends tend to hold up significantly better on the downside during bear markets. During this “flight to quality” throughout risk-off times in the equity markets, investors sell off risk (i.e. equities) and rotate into safer investments. Greater demand for bonds pushes yields down and prices up, notwithstanding the tailwind effects on this asset class during recessions when the Fed typically gets into action lowering interest rates.
The bad news is that there’s still no respite for those who need stable, long-term retirement income. Sources of income such as dividend-paying “RUST “stocks (Real estate, Utilities, Staples, Telecom), MLP’s, liquid (and illiquid) alternative investments, high yield bonds, preferred stocks and even equity- based annuities, continue to be popular with advisors and investors alike, even while adamantly taking on increased market, sector, credit quality, liquidity and or duration risks simultaneously in their golden years.
It may be ok to take on some unique plays in moderation – but it requires investors to prudently construct their portfolios with the right professional guidance and ongoing management, not just buying something from attending a steak-dinner. Balancing income with risk, liquidity and return has been a defining challenge of the past decade.
Thus, as is always the case, investing in the later stages of the business cycle will require increased scrutiny, discipline and patience, while constructing a liquid, flexible management process. The many false-starts we’ve witnessed with rising long-term rates are likely to continue, especially with global tensions and trade-talks in the balance.
The more the bond and stock markets are churning up fear in the later stages of the business cycle, the more unscrupulous advisors are coming out of the woodwork pitching “conservative” retiree’s complex, commissioned retirement income solutions that you would need a team of CPA’s to decipher the fine print.
Tuning-down the noise from the growing number of market crash predictions that are snowballing the news shows like an approaching Cat-5 Hurricane while avoiding products that seem “to good to be true,” can be a challenge emotionally, no matter your age, job, status or Mensa score.
It’s likely that those who stay invested and balanced across these roller-coaster periods will be in a better position to achieve their long-term financial goals and not outlive their money, than those sitting in cash and CD’s (thinking they are geniuses), or those reaching for high 6%-10% yielding illiquid vehicles (who are somewhat aware of their folly.)
The bottom line for investors? Interest rates are still low, the result of recent volatility and the culmination of a three+ decade trend. Investors should stay disciplined and patient as they seek long-term portfolio income from a combination of cash vehicles, dividends and capital gains, combined.
For more information on our firm or to request a complementary portfolio stress-test and retirement check-up with Jon W. Ulin, CFP®, please call us at (561) 210-7887 or email [email protected].
This material was partially prepared for Ulin & Co’s use.
Note: All indices are unmanaged and may not be invested into directly.
No strategy assures a profit or protects against a loss.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.