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Low Interest Rates are Rewriting Investing Rules

Low bond yields are frustrating income-oriented investors; diversification is the only answer.

 

As I sit down to write to you today, I can’t help but reflect on an article I read in the Wall Street Journal while riding on the train a few days ago. For the first time in history, a country has sold 10-year bonds at a negative interest rate. It may be hard to relate this event to your own personal situation – I believe the big take-away should be that prudent diversification among various investment types has never been more important.

 

Investors in Switzerland’s bond issuance last week will receive -0.055% per annum for the privilege of owning a Swiss government bond. Furthermore, on the same day Mexico issued bonds in Euros with a 100-year maturity at a rate of 4.2% (that may not look so great to those buyers in 20 or 30 years). These two extraordinary transactions highlight the strange monetary phenomena playing out across the world, and in particular in Europe. Governments are keen to push interest rates down to stimulate growth, while Switzerland is also taking aggressive action to halt a sharp rise in their currency. For investors, and in particular older investors, these low interest rates make for a difficult investment climate. Another way to see this is that the price of safe bond investments is peaking like never before – they are as expensive as they’ve ever been.

 

I point this out not to scare you or argue for a particular trade or action; I’m not sure anyone knows exactly where this all leads. Clearly, this is an expensive time to be a buyer of bonds. But should you be a buyer of real estate or stocks, both of which are also reaching all-time highs?

 

Perhaps like never before, prudent diversification is the wisest move at this time. Investors should maintain a solid reserve of cash on hand, and other investments should be well balanced between stocks, bonds and real estate. On the margin, bond prices seem to be the most overheated, so avoid large purchases there. But I would not expect a sharp correction in bonds either, as the forces driving up bond prices are strong and persistent. The economic events of the past 6-7 years will certainly lead to rising rates and inflation – which will surely deflate this bond “bubble” – but when that happens is unknowable. A well-diversified portfolio, which is tailored to your unique objectives and risk tolerance, is the best path to weathering uncertain times.