With equities being flat for the year, (S&P 500 has a 1.78% gain year to date) you may be wondering where the recent volatility is coming from. Unless you are an aggressive investor who only owns stocks, you likely also own bonds and depending what kind, they could be the cause of your concern.
Bonds are considered “safe” investments because they are guaranteed by the issuer. Most people own government bonds and the U.S. government has always repaid its debts without issue. What’s less commonly known is that every bond has a maturity schedule and it’s only at maturity that bonds are fully repaid. If you’re holding bonds in the interim then you’ll ride volatility that’s often felt with equities.
To add some complexity, bond prices go down when interest rates go up. The news of the Federal Reserve to raise rates three times this year drove down U.S. government bond prices. Subsequently, emerging markets have been struggling to compete for investor money and have hiked their own interest rates, driving down emerging market bonds and currencies. Argentina, for example, had to raise their interest rates to 44% to look more attractive to investors.
It’s difficult to imagine why the U.S. is raising rates, citing inflation, while the rest of the developed world maintains negative rates. The German 2-year bond has a -.64% yield and Japan is at -.15%. These countries are still fighting deflationary pressure while the U.S. appears to be ignoring those risks.
Holding U.S. equities and commodities along with your bonds are key. Higher U.S. rates make purchasing U.S. dollars more attractive, albeit necessary, which will drive demand for U.S. stocks and oil because they’re priced in dollars. Adding international real estate to the portfolio to take advantage of Europe’s negative rates (cheap mortgages) may also help propel your portfolio.
At Eureka Wealth Management, I can construct and manage your portfolio to take advantage of rising local rates while limiting risk. I also take into account your risk tolerance, tax situation, and time horizon for your money. For a free consultation call (760) 537-0791 or visit eurekawealthmanagement.com.