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It’s only the end of February, but a common theme of 2014 (so far) has been investors’ desire for more income. They’re chasing it more than ever and are hungry for income based investment ideas. In this week’s Mullooly Asset Management podcast, Tom and Brendan share some thoughts about this need for income. What they have to say might surprise you.
Brokers and advisors are searching for ideas to give their income hungry clients. The biggest issue with this situation is that many advisors, brokers, and investors are under the assumption that bonds are low risk and stocks high risk. Kind of sounds like a blanket statement to us. Nothing is ever that black and white, and we don’t necessarily agree that bonds are the low risk investment people think they are.
Here’s why. From 1982 until recently we saw interest rates move in one direction…down. Bond yields and bond prices have a direct, inverse relationship. To explain that phrase in an example: when yields go down…bond prices go up, when yields go up…bond prices WILL go down. In the low interest rate environment that existed from 1982 until recently, people got used to bonds being a safe investment that they could count on for income. However, interest rates have begun climbing higher, and that presents a problem for bond investors. Many people do not understand the direct, inverse relationship of bond yields and prices.
If you’d like to learn more about the relationship between bond prices and bond yields here’s a great video to watch: https://www.khanacademy.org/economics-finance-domain/core-finance/stock-and-bonds/bonds-tutorial/v/relationship-between-bond-prices-and-interest-rates
If you need more income from your investments, bonds may not be the sure thing they’ve been for thirty years now because interest rates are on the rise. Conversely, that also means stocks may not always be the overly risky investment they’re frequently labeled as. There are risks involved with any investment. Our point is that assuming bonds are a safe investment because they have been for the last 30 years is not wise. We believe that investors need to be aware of the effect rising rates have on bond prices. All things to consider and discuss with your investment advisor.
Tune into this week’s Mullooly Asset Management podcast and hear more from Tom and Brendan about the search for income, bond prices, and bond yields.