From the Blog

Investment Discipline with Asset Allocation

Posted on October 20, 2019

Doug Drabik discusses fixed income market conditions and offers insight for bond investors.

This year’s economy is creating challenges for investors, especially as volatility increases and yields oscillate within a range that has dropped year-to-date. It is easy to lose overall perspective and even make decisions based on momentary swings or even desperation in an attempt to capture a little more yield. Recently there have been several publications highlighting total return performances of various sectors promoting preferences. Below is intended to be an unbiased look at fixed income and equity indices covering a variety of ranges over the last year.

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The markets have shown extreme sensitivity to the U.S./China trade negotiations and lately, BREXIT talks; however, there are a multitude of world affairs playing a role, including: U.S. elections, Hong Kong protests, the global manufacturing recession, consumer spending slowdown, a potential German recession, impeachment inquiries, China growth concerns, European Union tariffs, short-term funding, etc.

Although fixed income investors are not primarily concerned with total return outlooks, these comparisons put asset classes on a more level playing field and allow for more informed side-by-side comparisons. The total returns above appear to show peak performances occurred early this year whereas over the last 3- and 6-months, things have slowed. As we expect, growth assets typically have higher highs and lower lows whereas fixed income indices reflect lower highs and higher lows. The takeaway is the importance of disciplined asset allocation. Growth assets are desirable for growth. Fixed income assets are appropriate for principal protection. The chart helps to endorse the importance of each. Disciplined investing and principal protection is of utmost importance during more volatile markets. We caution that this may be a period of return of principal, not return on principal.

When appropriating fixed income allocations, it is also important to emphasize that individual bonds provide a different protection than packaged product with bonds in them. Individual bonds provide investors with a stated maturity whereby redemption value does not depend on price movement and/or a net asset value. Stated maturities provide an investor with an option to hold a bond to its redemption date when a bond holder is entitled to the entire face value of their holding (thus protecting principal).

To learn more about the risks and rewards of investing in fixed income, please access the Securities Industry and Financial Markets Association’s “Learn More” section of investinginbonds.com, FINRA’s “Smart Bond Investing” section of finra.org, and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) “Education Center” section of emma.msrb.org.

The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.

Stocks are appropriate for investors who have a more aggressive investment objective, since they fluctuate in value and involve risks including the possible loss of capital. Dividends will fluctuate and are not guaranteed. Prior to making an investment decision, please consult with your financial advisor about your individual situation.