Financial Matters

Tips and news from the financial experts at Attentive Investment Managers.
Jan
03

The Role of Bonds

The Role of Bonds
Bond prices go down when rates go up, and rates are beginning to do just that. Preceding the current environment, we had nearly 30 years of declining interest rates and about 8 years of nearly zero rates. U.S. equities are up, and we are all holding our breath in anticipation of the all-time high 20,000 mark on the DOW so why would someone want to buy bonds?The purpose of bonds in a portfolio is not to generate massive returns.Bonds are an agent of protection against the most dreaded market risk – a crash in equities.In 2008, the last time the markets crashed a allocation that included bonds could have achieved a positive return while at that time stocks were losing 37%, meaning bonds were outperforming stocks. This is not to say that we are going to have a market downturn however, over time, investors holding bonds in their portfolio often experience a less bumpy market ride and fewer losses during downturns. In the bond markets, it's possible that the decades-long bull market—which b...
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Dec
15

Higher Rates: The Tempest in the Teapot

Higher Rates: The Tempest in the Teapot

Anybody who was surprised that the Federal Reserve Board decided to raise its benchmark interest rate this week probably wasn't paying attention. The U.S. economy is humming along, the stock market is booming and the unemployment rate has fallen faster than anybody expected. The incoming administration has promised lower taxes and a stimulative $550 billion infrastructure investment. The question on the minds of most observers is: what were they waiting for?

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Aug
05

Diversification

Diversification
So far, we have discussed the concepts surrounding building a financial pyramid, risk vs reward, and understanding your own risk tolerance. These ideas give you a clear path in which to create your ideal allocation of investments. Here is where diversification comes in. Whatever your risk tolerance level or what your goals are you must use diversification as part of your investment strategy. So what exactly is diversification?Diversification is allocating your assets across the major asset classes (stocks, bonds and cash) in order to make your best possible return within your risk spectrum. Each class then has a deeper diversification capability – you may take advantage of different investment styles such as growth or value stocks and even further by sector such as technology or healthcare. Diversification is a balancing act that encompasses your risk tolerance. All investments have a certain amount of risk and by utilizing diversification strategies your goal ...
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Dec
30

How the Feds Rate Increase Impacts Bonds

How the Feds Rate Increase Impacts Bonds
Prior to a couple of weeks ago, the last time that the Fed raised interest rates was 2006 – now with a mending economy the Fed Committee has increased the federal funds rate to 0. 25%-0. 50%, up from a range of zero – 0. 25%. It is quite likely that the Fed will continue to slowly raise rates over the coming months which will bring a mix of good and bad trends for the investment markets. An important component for investors, with regard to interest rates is the effect rates have on bond holdings.As seen in the example below, there are two major risks to bonds. 1) Interest Rate Risk – As interest rates climb the value of existing bonds decreases. Also, the longer the maturity the bigger the decline will be. The technical term for maturity is "duration", which is defined as a measure of the sensitivity of the price of a fixed-income (bond) investment to a change in interest rates. 2) Credit Quality – Think of this like a FICO score with a 'AAA' bond rating being an 820 FICO, while a 'B' ...
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