Planning a Fixed Income Course Through Uncertain Times

If you took a snapshot of fixed income investing at the end of June 2013, you might have concluded it was time to jump ship. Reacting negatively to uncertain economic news, many investors abandoned their existing plans (or had none to begin with), and sold off their bond funds in record numbers. Pundits predicted the worst. For example, a June 28 a Wall Street Journal MarketWatch column warned us: “Surging outflows propelled bond funds to an ugly June. But don’t expect those outflows to abate in July.”

Fast forward to the end of July, and the flows more closely resemble a swirling eddy than a plummeting cascade. The Chicago Tribune reported a mixed bag of results on July 25, based on Lipper tracking. Taxable bond funds experienced inflows. Municipal bonds continued to experience outflows but, as Reuters quoted one analyst observing, “‘It could have been a lot worse’ [was] the big take-away for this week.”

The point is, none of us can forecast the future, but current events aside, I see no strong evidence that the overarching laws of the investment universe have suddenly changed. While headline news may be helpful in other portions of our lives, I would not advise joining those who are betting their life’s savings on unknowable outcomes that are yet to unfold. Instead, by understanding the evidence that guides sound investing and ignoring the popular fallacies, you are much better positioned to chart a sound course through turbulent times.

Guiding Rule #1: Invest According to a Sensible, Customized Plan.

My first guiding rule is to begin with a plan. When setting out to invest across good markets or bad, I recommend you begin with a deep exploration of your personal circumstances, to determine the levels of investment risk you could or should accept in pursuit of your financial goals.

This is one of many ways that an objective professional advisor can add important value from the very beginning. For our clients, we typically craft an Investment Policy Statement (IPS) based on these explorations to guide our way. Only then do we make specific, customized investment recommendations for the portfolio, including building – and maintaining – an appropriate balance between stocks and bonds.

By adopting this strategy, your stock-bond allocations are closely tied to you and your needs. Your allocations are then also based on the available evidence on how markets are expected to deliver their long-term returns.

In contrast, current headlines are based on predicting events over which you and I have no control. While there is no guarantee that your carefully planned portfolio will deliver the outcomes for which it’s been designed, if you (and/or your advisor) took the time and energy to construct it according to your custom-built plans, I recommend you stick with it, ignoring the temptation to react to near-term news. This approach continues to represent your best interests and your best odds for achieving your personal goals.

In my next post, “Understanding Fixed Income Roles and Risks,”  I’ll explore my second guiding rule to fixed income investing: Bonds are safer; they’re not entirely safe.

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