Bad News For Bond Owners

By Thomas Shultz

April 1, 2018

In the original 1976 film, Bad News Bears with Tatum O’Neil and Walter Matthau, the Bears lose the final game, but they celebrate anyway because they played well.  As the saying goes, how you play is more important than winning, but retirement is one game nobody wants to lose.

Investors who are relying on traditional allocations inside a stock/bond portfolio for their current or future income needs will want to pay attention to the signs of changing market conditions. Well-known money managers in the field are saying that the bear market in bonds has begun and some even predict a historic crash. Learn why this is happening, the bearing it might have on your retirement accounts, and what you can do to protect yourself.

HERE’S THE SITUATION

 

Investors are taught to follow some version of the 60/40 portfolio model during their accumulation years. This formula allocates 60 percent of a portfolio into stocks for aggressive growth and 40 percent into bonds for protective measures. Our parents and grandparents relied on bonds as a fixed investment that could provide a more secure counterpoint to the variability of stock rates. Some investors allocate an even heavier portion of their portfolio into bonds as the time of retirement nears. Our economy has enjoyed a period of prolonged and sustained growth since 2009, stimulated in part by a low-interest rate environment and low inflation. We are now seeing the first signs that all of this is changing. Officials predict that the Federal Reserve will raise interest rates at least three times during 2018, with the first rate hike last month. The benchmarks for 10-year treasury yields are already climbing, bond prices are rising, and investors are bracing for inflation. 

WHY THIS MATTERS

Bonds have an inverse relationship to interest rates: they perform best when interest rates are moving lower, and worst when interest rates are going up. For the last 30 years, investors have been buying bonds as interest rates move downward, which means the value of the bond when sold would rise and the investor would earn a premium. Now, however, interest rates are going up.

As new, higher-interest bonds become available, the value of lower-interest bonds falls. Furthermore, as an economy in the late stages of accelerated growth, some economists point to signs that interest rates may rise even faster than what the Federal Reserve is signaling. Not only could your portfolio lose money but buying the things you need could also become even more expensive. 

WHAT YOU CAN DO

If bond funds represent a sizable portion of your income during retirement, then your lifestyle could be in jeopardy during the next 10 to 20 years as interest rates rise and inflation make its upward trajectory. Bond substitutes do exist. Now might be the perfect time to take a look at what those options are before rates go higher and your portfolio starts losing ground.

There are many life insurance solutions that can give you market-linked returns without the risk of a downside when things in the economy change. Fixed and indexed annuities currently offer returns that are competitive with bonds, but with the security of principal protection.  Some of these solutions also come with death benefits that leverage your money, give access to liquid funds, or the option of lifetime income, for a single individual or both you and your spouse.

The future of the stock market is uncertain, but the future of your retirement income doesn’t have to be. Schedule an appointment with us to talk about your income needs today. If the money you need to rely on for retirement is sitting at risk, the time to take action is now, before disaster strikes. Reach out to us today. We’re happy to help, and our advice comes to you with no strings attached.

Are you prepared financially for retirement, preserving your legacy, or a medical emergency?