For the second year, the North BayBusiness Journal surveyed wealth management advisers across the North Bay on three questions related to the investment climate today and long-term. Their responses follow.
(Listed alphabetically by company name)Colleen Supran, principalBingham, Osborn & Scarborough, LLC1201 Vine St., Ste. 102, Healdsburg, 707-433-7300, www.bosinvest.com
[caption id="attachment_78849" align="alignleft" width="200"] Colleen Supran[/caption]
Have you adjusted your investment strategies in response to economic trends over the past year? Why, or why not?
We have recommended some modest adjustments for many of our clients’ portfolios over the past year. First, we are reducing our clients’ allocation to Treasury Inflation-Protected Securities, TIPS bonds. These bonds have been great performers over the past few years as investors anticipated inflation that could result from the monetary policies of an accommodative Federal Reserve. A second change has been an increase in our allocation to emerging markets, which remain an important part of the global economy and therefore our diversified portfolios. The stocks of emerging market companies have underperformed other asset classes, giving us the opportunity to buy these securities at lower valuation levels. In a third change, we are making a small reduction in the average maturities of our clients’ bond portfolios. We want to reduce the volatility in bond performance if interest rates rise. All of these changes are intended to further stabilize portfolio values in an environment of uncertainty.
What mistakes do you see individual investors making in the current financial climate?
In general, investors are very focused on bond performance and the possibility that rising interest rates could lead to significant losses in their fixed income holdings. At the same time, many of these investors prefer to increase their allocation to stocks that are trading near all-time highs. History tells us that the potential losses from stocks are much greater than potential losses in short- to intermediate-term bonds. We believe that portfolio volatility in the future will be more closely tied to the performance of stocks, not high-quality bonds. Investors should be realistic about their risk tolerance and stick with a portfolio allocation that gives them the best chance of meeting their long-term goals.
A second mistake investors seem to be making in the current environment is buying securities that are sold as bond substitutes to earn higher yields. Investments that act like bond substitutes such as junk bonds, Master Limited Partnerships (MLPs) and other securities have higher yields because they are riskier than high-quality, low-yielding bonds. These types of securities can be very volatile when compared to high-quality bonds.
What trends are you anticipating will most impact investors over the next year?
Without a crystal ball, we have to assess the future based on what we see now. In our opinion, we would predict that investors are likely to be focused on central bank activity around the world over the next year. Central bank policy has wide-reaching implications for interest rates, currency valuation, and export growth trends. There will be winners and losers in the global economy and investors will express their expectations by buying and selling securities. This could create bouts of sharp volatility at times, particularly in stocks.Irv Rothenberg, principalBuckingham Asset Management, LLC3550 Round Barn Blvd., Ste. 212, Santa Rosa, 707-542-3600, www.wealthmc.com
[caption id="attachment_78833" align="alignright" width="200"] Irv Rothenberg[/caption]
Have you adjusted your investment strategies in response to economic trends over the past year? Why, or why not?
We have changed the recommended size of our municipal bond fixed income portfolio’s that use individual municipal bond purchases be increased from $500,000 to $1 million.
The motivation for the increase is to ensure we can maintain adequate municipal bond issuer diversification. We try to limit exposure to any single municipal bond issuer to no more than 10 percent of the total fixed income portfolio. The only way to do this for smaller fixed income portfolios is to sacrifice liquidity of the bonds purchased in return for diversification, which generally is not a tradeoff we choose to make.
Some people are worried about Detroit’s bankruptcy and if it has broader implications for the municipal market and whether it is a harbinger of further defaults. At this point, Detroit’s defaults and other defaults have been idiosyncratic and sporadic in nature, and the prediction of a wave of defaults (on rated bonds at least) remains extreme in our view, particularly given the pricing of Aa-rated and Aaa-rated municipal bonds in the market place, which is hardly suggestive of high default risk.