Short Term Pain for Long Term Gain


Posted in: Economics, General, Stock Market, Thought of the Week

This past week’s market sell off presented our Investment Committee with the opportunity to utilize our large cash position in the DIAS Conservative Income (CI) portfolio. As active managers, they attempt to use this cash to deliver the highest risk adjusted return, so let’s break down the options available to our income-seeking investors. In doing so, our Investment Committee will dismiss three widely believed myths to protect investors from the market risks that we see in the future.

Myth #1: Bonds are Safe and Investors Can’t Lose Money. Bear markets in bonds exist and the most recent one lasted 35 years from 1946-1981. The end of the greatest bond market in U.S. history is currently developing. Bonds have outperformed for the last 31 years, and as difficult as it may be to accept, bond prices have only one direction to go and that is down. The bottom line is that bonds are not always safe.

Myth #2: Interest Rates Can’t Stay Low for Too Much Longer. Some investors argue to simply stay in money market funds and CDs until the day interest rates rise – effectively waiting for the storm to pass. The U.S. 3-month Treasury bill yields 0.02% today. Income seeking investors that have stayed in money market funds and CDS have generated no income for the past 5 years on these investments. We do not anticipate an interest rate hike until 2015/2016 at the earliest.

Myth #3: Volatility in Equities is Bad. Many investors believe any weakness in the equity markets is an indication of worse times to come. Let’s use this most recent sell off, driven by fears of a potential strike against Syria and tapering from the Fed, as an example. A strike against Syria poses no fundamental change to our long-term investment of the stocks in our portfolios. Additionally, the Fed will only begin tapering when they feel that our economy is strong enough to survive on its own. These are positive signs for an investor.

We strongly urge everyone to read this article as it is extremely informative. Read this week’s Thought of the Week to learn more about investing for the long-term.

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As an Investment Advisory Representative working in conjunction with Global Financial Private Capital (GFPC) we are provided weekly thoughts on what is happening in the economy and the market. Written by our investment committee at GFPC we find these thoughts to be informative and interesting.