In my previous blog post, Understanding Fixed Income Roles and Risks, I explored Guiding Rule #2 for fixed income investing: positioning your fixed income for the role it’s meant to play in your portfolio. Understanding that role brings improved clarity and confidence to your decisions, especially when it comes to staying the course through uncertain times.
Still, it’s in our human nature to want to act from time to time. This brings us to my next and final point in this series …
Guiding Rule #3: Act on What You Can Control
Even as you’re remaining disciplined with your fixed income allocations, there are steps you can take to ensure that you’re making the most of your investment strategy. Here are a few.
- Are your fixed income holdings the right kind? Thus far in this blog series, I’ve spoken of fixed income as a single pot. In reality, just as there are various kinds of stocks, there are various kinds of bonds, with different levels of risk and expected return. Because the goal with your fixed income holdings is to preserve wealth rather than stretch for additional yield, I typically recommend that you construct fixed income holdings using high-quality, short- to medium-term bonds. If you have fixed income holdings that don’t fit this description, now would be an excellent time for us or your own professional advisor to analyze them, and determine whether changes may be warranted.
- How are your own goals and risk tolerance holding up? While they may not be fun times, periods of market uncertainty can be good times to revisit the plans you made during calmer times. Think of the current market as a field test. If you feel your portfolio may not be performing as hoped for or you don’t feel prepared to continue tolerating current market risks, let’s get together and take a look at the numbers. You may be pleasantly surprised by the assessment. Alarmist headlines have a way of generating levels of fear and pessimism that may not be warranted. That said, if your existing plans and portfolio are no longer meeting your personal goals or reflecting your true risk tolerance, we or your own advisor may be able to help you plan for cost-effective adjustments along a sensible timeline.
- Time for a rebalance? If it makes sense for you to remain invested according to your existing plans, market conditions may warrant a rebalancing, to ensure that your stock/bond balance remains at or near your target goals. If you’ve constructed your portfolio according to a custom-built Investment Policy Statement (an IPS, as described in Part I of this blog series), Planning a Fixed Income Course Through Uncertain Times, you would have allocated your holdings across various asset classes, according to percentages defined in your IPS. As the markets shift around over time, your investments tend to stray from their original, intended “weights” or allocations. Rebalancing is the act of shifting those allocations back where they belong. Because rebalancing often requires trades, it’s best to establish additional guidelines for when and how to cost-effectively do it. Also, consider using new money added to your portfolio to perform efficient rebalancing whenever possible.
Stay the Course
More than four centuries ago, Galileo Galilei is attributed to have said: “All truths are easy to understand once they are discovered; the point is to discover them.” He also was accused of heresy and placed under house arrest for the remainder of his life after he observed that the earth revolves around the sun.
Galileo’s experiences offer an early illustration that there’s a big difference between understanding and accepting best available evidence in an uncertain world. In many respects, investing is a scientific endeavor. But there are times when it requires courage and perseverance to remain confident about that evidence, particularly when others are succumbing to irrational doubts. For fixed income investing, for equity investing … for any kind of investing, we’ve said it before, and we’ll say it again: Build a solid plan. And then stay the course.