Bonds Beat Stocks for the First Time Since 1861!
An article that came across my desk earlier this week from Bloomberg was titled "Bonds Beat Stocks Over 30 years for First Time Since 1861". "The biggest bond gains in almost a decade have pushed returns on Treasuries above stocks over the past 30 years, the first time that's happened since before the Civil War." The article went on to say with inflation low, Fed Reserve rates near zero, slower economic growth and the highest savings rate since the global credit crisis made bonds the best assets to own this year.
So, if one is living on the income from a fixed income portfolio, why is the dollar amount being received going down? The fact that bonds' performance is high does not reflect the current interest rate most of us are receiving on our bond portfolios. If you recollect from a couple of columns ago, I wrote about how bonds are priced according the coupon (interest) rate, maturity and credit quality of the individual bond. If you have a high quality bond with a higher than current coupon rate the bond will sell at a premium. Remember that a premium is what you pay for the bond above par. Therefore, if you are holding high quality bonds in your portfolio they are probably being priced at a premium, which means your "market value" is more than what you paid for the bond originally. That means that the overall performance of your bond portfolio may be up, but not necessarily the amount of interest income you are receiving. To receive the premium one must sell the bond. Once the bond is sold, obviously, you no longer receive the interest. The monies you receive upon the sale must be reinvested to continue working for you. So you buy another bond, or place it in another investment vehicle, such as a savings account or maybe even a completely different category.
If you have bonds maturing and are looking to place the funds to continue an income stream the question becomes "What to do?". Part of the answer could be to diversify. Diversity means mixing stocks, bonds, international, hard assets (gold, silver) real estate, etc. We discussed asset allocation previously and it is just as important today as ten years ago. Some dividend paying equities or utility stocks can help to increase your income stream. Also, mutual funds that focus on commercial real estate rentals may enhance your income. Sometimes lengthening the maturity of your portfolio's duration can produce higher coupons, but remember the associated risks.
Everyone’s situation and needs are different. I believe that your overall risk tolerance and asset allocation decision is best made in discussions between you and your financial advisor. You may be able to increase both your income and your portfolio performance by mixing asset classes.
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