For decades, retirees have leaned on bonds as hedges against the riskier stocks and other investments filling out their portfolios. That’s not the case anymore, says Ben Boettcher, a certified financial planner for Helmstar Group in Boise.
Bonds can’t tank the way stocks can during an economic downturn. But with the Federal Reserve’s interest rate for overnight interbank loans at a rock-bottom 0.25 percent, bonds can lose value if sold before they mature, as retirees commonly do as part of their fixed-income strategies. Many bonds kept until maturity are providing thinner margins than in years past, making them only slightly more profitable than a savings account.
Boettcher says he explains the change to clients almost daily.
“A lot of people are having to make a decision to either move up on the risk curve to accomplish their retirement goals, or to cut back on their spending because they can’t take on more risk in their portfolios,” he says.
How bad have things become for the bond market?
This September, investors expected the Federal Reserve to announce that it would taper off its current effort to keep interest rates low — its 5-year-old effort to encourage business and mortgage lending — by ending its purchases of $85 billion in bonds each month. Instead, the Fed announced that the economy is too weak to taper off the bond purchases. That means interest rates will remain low.
Investors responded by pulling $60 billion from the bond market — about $20 billion more than after the Lehman Brothers’ bankruptcy ushered in the Great Recession in 2008.
The low-return bond problem, which also holds true for certificates of deposit, is exacerbated by recent memories of the Great Recession, says Donald Reiman, certified financial planner for Echelon Group in Boise.
Many investors saw their stock portfolios tumble during the recession. They want to invest in safer options now and don’t like hearing that bonds have become less useful as safety nets.
“This is creating a lot of frustration for people,” Reiman says. “The people averse to taking much risk are having to accept essentially no return in the traditionally safe investments. In reality, they may be losing money.”
Gerry Mattison, an adjunct professor who teaches finance and investment classes at Boise State University, has faced the devalued-bond conundrum in his own portfolio. Mattison says bonds made up a quarter of his portfolio a decade ago. That’s dropped to 10 percent as he has shifted to blue-chip, dividend-yielding stocks to replace bonds for cash flow.
“Stocks like Chevron, AT&T, Microsoft, all of those guys are paying 3-plus percent and are very strong, sound companies,” Mattison says. “You aren’t going to lose your shirt over them. There is volatility with them, but they still pay a very nice dividend every year.”
Boettcher says the loss of bonds as a strong, conservative portfolio anchor has the greatest effect on middle-class investors planning to retire. That means folks without a big nest egg that can withstand a downturn have to include lifestyle changes in their strategy.
“People don’t like hearing they may have to cut expenses or pick up part-time work,” Boettcher says. “But it’s obviously better than having to tell a client, ‘You’ve lost all your money because you took too much risk in your portfolio.’ ”
While bad for retirement-age investors, low interest rates create other opportunities for 30- to 55-year-olds looking to get ahead, Boettcher says.
The low rates have helped people refinance mortgages, Boettcher says. Instead of rolling money saved through refinancing into retirement funds, many homeowners have increased spending or bought more-expensive houses, he says.
“With the benefit of hindsight, 55-year-olds would love to be in today’s 35-year-old’s position with 3 to 4 percent interest rates and what that could mean in the long term,” he says. “I’m not sure that the younger generation is taking advantage of it.”
Zach Kyle: 377-6464