Tag: bonds

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The Best High-Yield Savings Account

Bond yields are relevant again. (Photo: Acton Crawford | Unsplash)

One silver lining of this current market cycle is the increasing relevance of bond yields. For years, yields have inexorably marched downward, which has resulted in generally favorable total returns for bonds but not a lot of income. Now that bond prices have fallen somewhat, yields are much more attractive than at any time in recent history.

As a consequence, yields on things like CDs and high-yield savings accounts have risen sharply, and the relentless pursuit of the best rates has turned into the equivalent of a grail quest for many investors with cash on the sidelines. To save you time and trouble, I am happy to present the best, most dominant solution for your cash today. You can get two-point-nobody-cares percent by opening an account at your local It Does Not Matter Bank!

I am intentionally being provocative, but I think for good reason. I am an optimizer, and I fully understand that if you have a need to have cash around, it makes sense to get the best possible rate. However, there comes a point where the effort it takes to find the best yield can take away from focus on the big picture or can even be counterproductive. For example, too many credit pulls from new bank accounts could reduce your credit score and make the mortgage you are saving a down payment for much more expensive down the road.

I would go as far as to argue that the pursuit of the highest yields on cash is always irrelevant. If the time horizon is short, the slight delta in yield from one account or money market fund to another won’t matter much at all. If the timeline is long (or undefined), you should think about not being in cash at all and putting your money somewhere with a better chance of not just keeping up but beating inflation in the long run.

There’s one good reason to keep a lot of cash around: You have a definite or likely need to spend money on specific large expenditures soon. There are many reasons to keep a lot of cash around, which in our opinion are not so valid:

• Some people do not like to be invested when the market does not “feel right” (hint: it never feels right).

• Some people want to wait to invest until there is some certainty, but by the time you digest any good news, the market will have already reacted.

• Some people just want the safety and security of cash, but even the highest yielding cash accounts mean that any kind of inflation is going to rapidly erode your savings.

Any amount of time or effort you spend to achieve an extra 0.2 percent per year on cash would almost certainly be better spent focusing on what really matters. Indeed, the real grail quest we should pursue as investors is how to cultivate a meaningful long-term real return, represented by attractive total returns from interest, dividends, and price appreciation after considering inflation. There’s little evidence that any sort of cash or cash equivalent will help you do that in the long run.

Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your questions or schedule an objective, no-pressure portfolio review at letstalk@telarrayadvisors.com. Sign up for their next free online seminar on the Events tab at telarrayadvisors.com.

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What’s Up with Bonds?

Bonds and stocks are uncorrelated, not negatively correlated. (Photo: Mathieu Stern | Unsplash)

What’s going on with bonds right now? Though 2022 has been a challenging year for fixed income, you might be surprised to learn that the death of bonds has been greatly exaggerated.

For context, bonds historically return less than stocks in the long run. From 1926 until the end of 2021, a large cap U.S. stock index returned over 10 percent a year, while a 5-year government bond index returned about 5 percent. Compounded over time, that is a massive difference.

Why would anyone want bonds then? They have two advantages over a 100 percent stock portfolio that you should care about — they are somewhat uncorrelated to stocks, and they tend to have less volatility.

Two things that are uncorrelated don’t automatically move in opposite directions — that would be negative correlation. With completely uncorrelated assets, the movement of one has no impact on the movement of the other one. This is something very desirable, since you don’t want everything in your portfolio going down at the same time.

Less volatility is also very much a good thing, meaning generally that bonds tend not to fluctuate up and down as much as stocks. This year is a great example — the Bloomberg U.S. Aggregate Bond index is down about 10 percent at the time of this writing. That’s one of the worst years on record for bonds, but it would only be a middlingly bad year for stocks. But isn’t this year a bad year for stocks, too? Let’s look at the big picture.

For a retiree, one of the worst things that can happen is a large portfolio drawdown in the years just before and after retirement. A crash just before retirement might force a delay to retirement plans. Worse, a crash just after retirement could dramatically change retirement lifestyle as assets are spent down while their prices are depressed.

We tend to allocate more to bonds around retirement because our best hope for bonds is that in a stock market downturn bonds will likely either go down less or even go up some.

You might be surprised to learn that is working, even this year. Looking at our portfolios and also target date portfolios from several major fund families, allocations with more bonds are performing better than allocations with more stocks. In other words, bonds are mostly down, but stocks are mostly down more. Bonds aren’t experiencing tremendous outperformance — it would be nice if they were actually up this year — but if you had a crystal ball and allocated more to bonds at the beginning of 2022 you would likely be better off than being 100 percent stocks at this moment.

Of course, we have no idea what direction bonds (or stocks) will go from here, at least in the short term. In the long term, we are optimistic to see returns of stocks and bonds in line with historical experience. We are also optimistic that in the event of a more intense stock market correction, bonds will likely perform even better in the likely flight to safety reaction of market participants.

As bond prices have fallen, bond yields have risen to a more attractive level, which is another silver lining in this challenging year. One of the biggest complaints is that bonds have had “no yield” for quite some time. With bond yields higher and inflation on the way down, we could be set up for a period where bonds provide a meaningful source of real return in addition to their ability to dampen stock market declines.

In short, 2022 has been a challenging year for bonds and stocks, but bonds continue to fulfill a very important role in investment portfolios.

Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your questions or schedule an objective, no-pressure portfolio review at letstalk@telarrayadvisors.com. Sign up for the next free online seminar on the Events tab at telarrayadvisors.com.

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Bonds in Bad Times

Photo: Andrew Neel | Unsplash

We have been closely following the conflict in Ukraine. While the situation is evolving rapidly, it appears for the moment that Russia remains steadfast in its desire to prosecute this ill-advised offensive while Ukraine remains steadfast in its desire to defend the country. If recent decades of history are any guide, the Russians will be unsuccessful attempting a long-term occupation, but in the meantime, they can inflict a great deal of damage.

Bonds are getting a lot of negative press these days, and some of that negative press is rightfully earned. Bond yields are as low as they’ve been at any time going back at least to the early 1960s. More importantly, given the relatively high inflation we’re experiencing, most bonds are currently experiencing negative real returns. This means that the purchasing power of money invested in bonds could decline, at least slightly, as time goes on.

So why in the world would somebody own bonds? The answer is that 100 percent of every investment portfolio in the world has to be invested — in something. Most people should not — or cannot — invest their portfolio 100 percent in stocks, even if stocks are likely to beat bonds (and most other asset classes) in the long run. Even if an investor does have an iron constitution and can handle the volatility of an all-equity portfolio, there can still be problems around retirement known as sequence of returns risk, where a big stock drawdown can mean investors must sell their equities while markets are depressed. This can impair retirement plans even if the market has an attractive return over the full retirement period.

Every dollar not invested in stocks has to go somewhere else. You can’t just stick money in cash and say it’s “off the table.” That capital is still acting as a drag on your portfolio in most markets and therefore must be included in your returns. Diversifiers such as real estate, gold, or other commodities may be part of the answer, but they are likely to have no real return greater than inflation in the long run.

Even today, bonds are not hopeless. Bonds can perform entirely adequately in environments of rising interest rates and bond yields, such as the period from 1962 to 1982. The performance is not stellar, but bonds do what they need to do, which is mitigate the volatility of equities, especially in big equity drawdowns.

When you watched the news of the invasion in Ukraine last week, did you worry about your stock portfolio? Did you wish you had more bonds in your portfolio? Did you even momentarily think about going to all cash? If so, then you should seriously consider a little more defense (aka more bonds) in your portfolio. The time you need to decide on a less risky portfolio is before the bad news comes out, not after. Bonds have an important portfolio role in bad times, which is why it’s a good idea to get them in place when things are good.

Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your question at ggard@telarrayadvisors.com or sign up for the next free online seminar on the Events tab at telarrayadvisors.com.

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Invest in Memphis Sewers!

You’ve been depositing your tax dollars into the Memphis sewer system for years now. Here’s your chance to to get a little of that money back.

Financial forecasters at Fitch Ratings assign the City of Memphis sanitary sewerage system revenue bonds an “AA” rating. Fitch likes the system’s low rate structure, manageable capital needs, and “rapid debt amortization,” among other attributes that make no sense to us. We’re uncertain, for instance, whether “low liquidity” has to do with the sewer or the bonds.

Anyhow, the Fitch report says that our residential and commercial wastewater bills are the lowest in the country compared to similar municipal sewer systems.

New MLGW president Jerry Collins oversaw the city’s wastewater treatment facilities as director of public works during its transformation from environmental hazard to sound investment.

The bonds go on sale December 4th through Morgan Keegan, with proceeds financing capital improvements to the city sewer system.