COLUMNS

ARBOR WEALTH: Stocks, bonds, Kevin Costner and Charlie Rich

Staff Writer
The Destin Log

“Can’t take it with you when you’re gone …

But I want enough to get there on.” From “Rolling With the Flow” by Jerry Hayes and recorded by Charlie Rich

Today’s markets are, as Kevin Costner said in the 1991 film JFK, “through the looking glass.” What do we mean? Well, bonds (fixed income) have traditionally been considered a less risky investment than equities (stocks). But, currently, this is not necessarily true. It’s an upside down investing world. Alice, it’s your move in the Wonderland of Capital Markets.

Historically, bonds are popular for many reasons. Bondholders are high on the “default ladder” and are paid before stockholders should a default occur.  Secondly, when a bond matures, you get your original investment back, in addition to the yield you’ve been paid throughout the life of the bond. Bonds have also been known traditionally for their stability: in good times and bad, bondholders of credit worthy institutions are paid on time and their money is considered reasonably safe. Payments were made to owners of U.S. treasuries even while the Civil War raged. Municipal bonds remain one of the few ways that high wage earners can catch a tax break, since interest earned from “muni” bonds is not subject to federal tax. In years past, some investors even went so far as to create all-bond portfolios. 

Currently, though, most investors are leaning to equities. Why?While equities certainly are more expensive than they were even eighteen months ago, many dividend-paying stocks are paying more than bonds when considered on an apples-to-apples basis, a comparison known as the “equity risk premium”. And some equities, like utilities (referred to as “widow and orphan” stocks) for instance, represent investments whose dividends are seen as sound as the yields offered by some types of bonds. Another bond concern is that the face value of longer-dated debt will likely decline when the Federal Reserve raises interest rates, perhaps as early as next year.

Naturally, an investor’s financial objectives and risk tolerance should always be considered. Certain bond purchases may indeed successfully fill a fixed income need in a portfolio, even in an economy in recovery amidst a rising interest rate environment. Convertible bonds, high yield bonds, senior loans, and bank loans are a few to consider.  But the traditional 60 percent equities/40 percent bonds investment ratio that so many investors have utilized for years wasn’t designed for this type of environment. Even “Bond King” Bill Gross of PIMCO declared an end to the 30-year bond bull market last year. 

Equities are no longer cheap, but they aren’t extremely overvalued when compared to what bonds are offering these days. There are always underappreciated companies whose prices haven’t risen with the rest of the market. 

 Margaret R. McDowell, ChFC, AIF, a syndicated economic columnist, is the founder of Arbor Wealth Management, LLC, (850-608-6121 — www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin. This column should not be considered personalized investment advice and provides no assurance that any specific strategy or investment will be suitable or profitable for an investor.