How to Invest in Bonds as Interest Rates Rise

Written by Rob Copeland | 14 August 2018

Rising interest rates are said to be the enemy of bond investors--and since we're not in an environment of rising rates, many people are wary of buying bonds at all.

However, there are good reasons to avoid going to that extreme, as I'll explain.

One reason rising interest rates are a big deal right now is that they've been so low for so long. To support the recovery after the Great Recession, the Federal Reserve lowered a key interest rate, known as the Federal Funds Rate, to near zero. It stayed there through 2015, but has gradually risen to its current 1.91%.

And the Fed has signaled its intention to continue raising interest rates. As rates climb, the value of existing bonds falls, because newly issued bonds pay higher rates. A five-year bond paying 5% is obviously less attractive than a five-year bond paying 6%. Bonds with longer maturities lose more value, because their owners are stuck with more years of getting paid the old, lower interest rate.

What's important to understand is that your bond only loses value if you choose to sell before it matures. If you hold it until maturity, you will get your principal back, assuming that the issuer is in good standing.

The reason most portfolios should include bonds, even when interest rates are rising, is that bonds play an important diversification role. Historically, in periods where stocks have fallen significantly, bonds have served as a cushion against steep losses.

To own a stock-only portfolio, devoid of bonds, would be to put all of your eggs in one basket. This doesn't mean you should stick your head in the sand in terms of the impact rising rates can have on bonds. It just means you have to make adjustments.
There are two things to consider. First, select bonds that you are comfortable holding to maturity. Don't think of your bond holdings as a piggy bank that you can break open if a need for cash arises unexpectedly. By holding to maturity, you'll earn the interest payments, or "coupon," and get your principal back unless the issuer defaults.

Second, consider investing in bonds with shorter maturities. As described above, a shorter-term bond won't lose as much value as rates rise, because they don't keep the buyer's money tied up as long.

So what percentage of your portfolio should bonds comprise? Which types of bonds, with which maturities, should you own? The answer depends on your individual situation—what your goals are, what your investing timeframe is, how comfortable you are with risk, and so on. Please feel free to give me a call if you'd like to discuss the best options for you.

The Risk of Waiting for a Cheaper Market

Written by Rob Copeland | 13 July 2018

You may have heard that now is a bad time to invest your money in the market. And on some level that may feel true.

Stocks are expensive, meaning there may be a correction at some point. Interest rates are rising, which could slow down the economy and impact stocks. And we're entering a trade war with China, which could also hurt the economy. Many investors have recently asked me whether they should simply wait for a stock market correction so that they can buy stocks "on sale."

My response is that the best time to be in the market is always NOW. I'm not talking about the money that you'll need in the next year or two—that should be in a safe, liquid instrument like a money-market fund or CD. I'm talking about your long-term money, the money you won't need for at least five years. Here's why that long-term cash should be put to work in the market now.

Many investors assume they'll know when to invest following a correction. But there's no starting gun when the market hits bottom. The market may keep dropping, with fear and pessimism setting in. Given that scenario, will you really have the stomach to get back in early enough?

Conversely, what if the market keeps going up for the next year or two, a scenario that is quite plausible? You'll potentially lose out on significant gains while you wait, wait, wait for that correction. It's almost impossible to gauge the stock market peak, just as it's almost impossible to get the low point right.

Finally, let's look at what many investors would consider a worst-case scenario: You get into the market now, and it crashes tomorrow. Surprisingly, history shows that you'd still come out ahead.

Let's say that you invested a lump sum in the stock market on the very last day before the massive correction began in October of 2007. You'd be back in the black in four and a half years (if you continued reinvesting dividends), after one of the worst bear markets in history.

Now, what if you had waited until that correction to invest your money—you remember, the "buying on sale" strategy. Researchers have found that between 1926 and 2016, investors who waited to invest until a correction occurred had earned just half of the market's return five years later. The lesson: Time IN the market beats TIMING the market.

If you are nervous about entering the market at this point, it's natural. One way to get in without losing sleep is to use what's know as dollar-cost averaging. This refers to putting a pre-determined portion of your cash into stocks each month. Dollar-cost averaging ensures that if there is a market crash in the near term, you will have invested at least some of your money at lower prices.

Each investor is different, both in terms of their financial goals and their ability to tolerate risk. It's important to meet regularly with a good financial advisor to make sure you're making the right decisions for your long-term financial security. Please don't hesitate to contact us if you have any questions.

Is This Your Advisor's First Rodeo?

Written by Rob Copeland | 14 June 2018

The last stock market crash, in 2008, is becoming more of a distant memory every day.

Since the spring of 2009, we've been in a market that has gone increasingly higher. And in periods like last year, it did so with very few significant dips along the way. This year, however, volatility has returned. And while that doesn't mean a bear market is around the corner, market experts say it's just a matter of time.

The biggest thing investors need to be wary of, however, isn't the market. It's the experience level of those who are guiding you through it. Think about it: If your advisor is under 30, he or she has zero experience navigating through a serious market downturn. If they're under 40, it's likely they've only been through that one downturn and then a long period with the wind at their back.

Robo-advisors, too, have yet to be tested. They were all created during the current bull market, so they've benefitted from easy conditions the entire time. And if you're a DIY investor using a discount brokerage, chances are the nearly decade-long market rise has made you a little complacent.

I feel strongly about this topic, because as a two-decade veteran of the business, I've learned what it takes to succeed in different market conditions—and I know that many investors and advisors are simply unprepared.

If you might be flying through rough weather, you want a captain who is a seasoned navigator. That's almost always a human financial advisor, who should be:

• An industry veteran who has been through multiple market cycles
• A competent and ethical professional
• A true advisor, rather than a stockbroker presenting himself as an impartial guide.

BrokerCheck will give you a snapshot of a broker's employment history, regulatory actions, and investment-related licensing information, arbitrations and complaints.

The Securities and Exchange Commission's public disclosure site can provide you with background information on a financial advisor and details about the practice and what kinds of clients they typically serve. It's always best to work with an advisor who's experience in serving people that fit your financial profile.

Please contact us if you'd like to discuss how to prepare your investment portfolio for changing market conditions. 

When You Can't Trust Your Financial Advisor

Written by Rob Copeland | 14 May 2018

Imagine that a financial advisor wants to sell you a certain mutual fund.

"Is this the best fund for me?" you ask.

"Maybe not, but it's good enough," the advisor responds.

Incredulous, you reply: "If it's not the best, then why are you recommending it?"

"Because it pays me a bigger sales commission than the other choices," he replies.

If any sane customer heard their advisor say this, they'd be out the door in a flash. But countless investors do business with advisors who operate under this same conflict of interest. It's just that, unlike in our fictional example, the advisors' agenda is not out in the open. And they're not required to disclose their financial conflict of interest. So customers just don't know.

The truth is that most advisors do business under a set of rules that allows them to put their own financial interests ahead of their clients' financial interests. However, a significant minority of advisors operate under what is known as a fiduciary standard: They are required by law to put their clients' best interests ahead of their own. In other words, they are the opposite of the advisor described above. A conversation with a fiduciary advisor would go like this:

"Is this the best fund for me?" you ask.

"Yes, it's the very best fund for your needs," the advisor responds.

"Are you earning a big commission by selling it to me?"

"I'm not earning a commission at all," he replies. "I avoid that conflict of interest by charging a flat percentage fee each year on your entire account."

In a nutshell, this is why you should insist on working with a fiduciary advisor. It's also important to know that advisors can't just call themselves fiduciaries. They have to be registered with the Securities and Exchange Commission or financial regulators in their state as fiduciary advisors.

If they are registered as brokers with Finra (the regulator for brokers), they do not have a legal requirement to put your financial interests ahead of their own. The first advisor in this article is a Finra-registered broker. The second is a fiduciary advisor.

If you're investing for retirement or any other important goal, you can't afford to work with someone who's allowed by law to shear you like a sheep. You need to work with a fiduciary advisor. If you'd like to learn about more about how Copeland Wealth Management, a fiduciary advisor, puts your interests first, please give us a call.