“Power is like being a lady ... if you have to tell people you are, you aren’t.”
Margaret Thatcher, English Leader(1925 - )
As the years have gone by it seems that things like car repair, investing and hair care have become more complicated. As a teenager I was a “tom-boy” who hung out with the guys who worked on cars. Through osmosis I learned how to change oil and rotate tires. Today I don’t dare to touch anything on my car because the results could be disastrous and even life threatening. The risks of DIY (do-it-yourself) car repair greatly outweigh any perceived benefits. My technically competent and caring mechanic is worth his weight in gold or silver.
Only her hairdresser knows for sure
The DIY approach to highlighting my hair is also history. There was a time when strategically placed lemon juice and a day in the sun created that sun-kissed look. Once the grays started showing it was clear that DIY didn’t cut it and it was time to enlist professional help. My hairstylist is now the expert for the “natural organic multidimensional color.” When asked “Why does my hair always look so much better when you do it?” she could’ve laughed and given me a short, sweet “Duh!” but instead she graciously replied “The same reason you’re better at investment planning than I am.” Depending on who you talk to, the hazards of botched hair color are no less severe than the risks associated with mismanaging an investment portfolio.
Weigh it out
The Great Recession has been particularly unkind to the municipal bond market. Fixed income investors face risks they may not have considered in the past. Interest rates are near historic lows and may move higher; this could cause the value of fixed income investments to decline as illustrated in the table. When interest rates go up bond prices generally decline and vice versa, it’s like a see-saw. There’s also concern over the financial condition of states, cities and agencies that issue municipal bonds. This brings new uncertainty to an area of the fixed income market long considered to be quite safe.
See graph, this page.
Know what you own and why you own it
If you own bonds ask yourself why. Is it primarily to offset the volatility of the stock (equity) portion of your portfolio? Or are you planning to hold your bonds until they mature for the return of the full principal amount? If so, day-to-day price fluctuations may be of less interest. It’s as if you bought a cow for the milk; the price of beef on a day-to-day basis wouldn’t be your primary focus, the milk, or income flow is what’s important.
On the other hand, if you have a large concentration of long-term bonds, be aware of what could happen to the principal prices of those bonds if interest rates move up significantly. Generally speaking, rising rates have greater affect on longer-term bond prices. Similarly, bonds with shorter maturities tend to be less sensitive to changes in interest rates. Therefore, investors may want to rebalance portfolios, moving more assets into short-term bonds or perhaps even considering shifting into other asset classes such as dividend paying stocks.
Municipal credit risk
Many states and cities have experienced significant declines in revenues from income, sales and property taxes without a corresponding decline in expenses. This has caused the financial health of some issuers to erode, generating concern that some might not be able to meet their obligations. The bond market calls this “credit risk.”
The facts are that historical defaults by issuers of municipal bonds remain quite rare, yet the rating agencies evaluating the credit quality of municipal issuers have issued downgrades on some bonds often leading to price declines. Buyers are now more cautious, even on highly rated municipal bonds, contributing to a general uneasiness in the muni market.
These developments suggest that it’s a good time to re-examine municipal bond holdings, especially for any significant exposure to a single state or municipal issuer. As with most investments, quality and diversification are important with muni’s, particularly now. However, diversification doesn’t ensure a profit nor protect against a loss.
Now is not the time for complacency. Reevaluate municipal holdings relative to today’s risks, the increasing complexities of the overall economic environment, expectations regarding interest rates and your financial objectives. Now is the ideal time to examine your fixed income investments in context of today’s market. And if you’d also like the name of my mechanic or hairstylist just let me know! Stay focused and invest accordingly.
This article provided by Darcie Guerin, Financial Advisor & Branch Manager of Raymond James & Associates, Inc. 606 Bald Eagle Dr. Suite 401, Marco Island, and FL 34145. She may be reached at (239)389-1041, email Darcie.Guerin@RaymondJames.com or visit Website www.RaymondJames.com/Darcie. *The Information contained herein has been obtained from sources considered reliable, but we do not guarantee that the foregoing material is accurate or complete.