Reducing portfolio risk
Doug Drabik discusses fixed income market conditions and offers insight for bond investors.
Investing in financial markets is not for the timid. In a very recent Bond Market Commentary, the Head of Fixed Income Solutions, Nick Goetze, discussed “Preparing for the Storm.” In short, he highlighted the emotional side of financial investing: the idea that investors can feel emboldened when their paper wealth has grown, and that this may serve as justification to take on higher levels of risk. The “storm” represents the time when the financial markets begin to turn against an investor’s holdings, and there is a tendency to either ignore the signs or be ill-prepared for its impact. The emotional cycle of investments, when not aligned with the economic cycle, may lead investors to sell riskier assets at the absolute worst time.
We woke up this weekend to an actual storm. Geopolitical risks can pop up overnight, just as we are experiencing U.S. military action in Iran. This is not a political platform, but regardless of your political affiliation or personal opinions, geopolitical events can be storms raining down on one’s financial strategy. The Strait of Hormuz is basically shut down. Roughly twenty percent of the world’s seaborne oil and gas travel this route. Consumer airline traffic throughout the Middle East will be compromised. Oil prices and stocks will be impacted today. Tactical traders react to these events; however, isolated events are not typically reasons to change long-term strategic investment plans. This may, however, serve as a reality check on why it is so important to be financially prepared to weather unforeseeable storms.
The diagram illustrates the different emotional moods investors may experience. Navigating these emotions may be as imperative as navigating actual geo-political storms. We have been hovering in a period of euphoria as stocks have experienced double-digit returns in six of the past seven years. Housing prices have grown, adding to paper wealth. Salaries have kept pace with inflation. The average investor has benefited from an upsurge in wealth. Emotionally, it may feel like an ideal time to double down and take on risk but let this weekend’s event serve as a check on long-term strategic planning. Interest rates remain relatively elevated. Now may be an ideal time to rebalance recent growth from other assets into individual bonds to help preserve this wealth and add income via higher yields. A reduction in risk may be the better long-term strategic investment portfolio plan.
The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.
Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value.
To learn more about the risks and rewards of investing in fixed income, access the Financial Industry Regulatory Authority’s website at finra.org/investors/learn-to-invest/types-investments/bonds and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) at emma.msrb.org.
