If the 2-year yield rises along with short rates by 0.50% to 1% and the spreads remained the same, the 10-year yield would rise from 2% to 2.5%. This rise would put pressure on bond values. To lessen the risk from falling bond values as interest rates rise, the average maturity of a bond portfolio can be shortened to reduce interest rate risk, also known as duration risk . This can help mitigate the decline, but the likely total return on bonds may be flat to slightly negative over the period of rising rates. However, the downside risk of bonds is still likely to be significantly less than other investment assets during periods of short-term volatility and should still be a significant portion of an investor’s portfolio to help dampen the downside risk, as was shown during the shutdown in 2020. Stocks OVER THE MARKET’S HISTORY, riskier assets, such as stocks and other alternative investments, have shown to help provide
real return above inflation. Investments like gold and other commodities have
wealth. In the short run, companies with pricing power such as semiconductors and some consumer brands can pass through flexible price inflation to consumers and maintain real earnings and profit growth. Financial stocks tend to do best in rising interest rate environments. And, during periods of sticky inflation environments, such as in the period of 1975 to 1982, stocks have provided the best opportunity for real return. During that period, annual inflation ranged from 5% up to 13%. In those same years, stocks provided real returns in five of eight years and only had two negative years–which is typical for the stock market over any economic environment. More importantly, over those eight years, prices rose by 96% while stock prices rose by over 200%. And, of course, during periods when inflation is not a challenge, the stock market also provides significant real returns with an average annual “real” return of 4-5%.
Disclaimer: This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment. Advisory Services offered through Alera Investment Advisors, LLC. Securities offered through Triad Advisors, LLC. Member FINRA/SIPC. GCG Financial, LLC, Alera Group, Inc. and Alera Investment Advisors, LLC are not affiliated with Triad Advisors, LLC. Information provided by GCG Financial, LLC should not be considered tax or legal advice. Should you require tax or legal information, please consult your tax advisor or attorney.
been used in short periods to mirror rising flexible prices. In the past, emerging markets were also a good proxy to provide inflation protection due to their commodity driven economies. However, recently, these economies have become more dependent on technology and less on commodities. The return from commodity- related investments has been relat ively minimal and temporary. For most investors, simply tracking price changes and inflation is not a long-term solution to providing real returns. Historically speaking, stocks have done the best to create real returns and long-term And, during periods of sticky inflation environments...stocks have provided the best opportunity for real return.
Conclusion INVESTORS ARE LOOKING for opportunities to provide “real” return on their money to overcome the impact of rising prices. Bonds can still provide the stability in an investment portfolio despite rising interest rates. As history has shown, total return on bonds can still be positive, as it has been in five of the last seven rising rates environment. However, whether the current inflation threat is “transitory” or longer lasting, the stock market has shown
in high inflation environment of the late 1970’s, early 1980’s and throughout the history of the stock market that it can provide the “real” return above inflation to help investors create wealth and combat the effects of rising prices.
To schedule a meeting with one of GCG’s Wealth Services advisors regarding your investments, follow this link . Interested in a market recap of Q4 2021? Register for our webinar on January 26th at 11:00 AM CST.
Personal Finance Quarterly | Winter 2022
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