Growing Concerns for Conservative Investors

There are some growing concerns for conservative investors having to choose between bonds and equities. Current bond returns today are minimal, and returns on cash are even less. Since most conservative investors are holding bonds for security and cash to live on, the weighting in these segments are pulling this part of your current portfolio’s gain down to 2% or less. Bonds offer little comfort even in those considered highly rated and safe.

Near term FED interest rate increases may cause many investors to think bond interest rates will also go up, creating higher income for the bond portfolios. This may be true, but not in the short term. Returns on bonds currently held in the portfolio tend to go down in value as interest rates increase. Only bonds purchased after the rate increases are likely to benefit, but this could take years.

Adding to this is the threat of inflation. Inflation has not played a key role in the past few years as it has averaged around 0-1%, but there is pressure pushing up inflation and the closer it gets to 2%, the less buying power your cash and bond interest has. Unfortunately, there is little opportunity to increase returns without increasing risk.

This leaves us the issue of the equity portion of your portfolio. Equity returns are exceeding historic averages, and stock prices that remain at all-time highs today could be subject to a correction. As such, the equity market is not a place to go for bond alternatives, as its risk possibilities are also relatively high.

This leaves conservative investors with little choice as there are negative influences from cash, bonds and equities. We have been concerned about this for a few years now and have been looking for ways to increase the return of the bond side of the portfolio without increasing the overall risk. We think we have found a solution. Contact us for more information.

• By Greg St John, Executive Vice President