Bond Outlook 2016
Happy New Year 2016! 2015 was a choppy year for investments in your retirement accounts. The S&P 500 closed at 2058.20 on January 2nd 2015 and the close on December 8 was 2063.59. A long overdue correction happened in September/October. 2016, might be remembered as the year of rising interest rates. Bond investors over the last 5 to 20 years had a good run. As interest rates went from high to low, mutual funds and individual bonds paid a solid dividend, as well as seeing increased values while rates dropped overtime. The dividends and plans of increased value of bonds have disappeared. It is hard to get excited about individual bonds and bond funds that are struggling to kick out 3% in dividends. When you consider fees into the equation it looks frankly, unappealing. While it is customary to have a healthy balance between stocks and bonds in your portfolio, the future bond market could create a drag moving forward. It might be worth looking into a fixed annuity as an alternative for a portion of the bond and bond funds in your portfolio.
Understanding the challenges facing bonds as rates rise is complicated. Let’s say you owned a bond that was paying you 3% and you wanted to sell it. Consider new rates were up and someone could buy a new bond paying 5%. If you paid $100 for your bond, why would someone pay you $100 for 3% when they could buy a bond paying 5%? Likely, you would have to sell it for something below the $100 you paid. This dynamic will be in play as rates rise. Some advisors would suggest putting a larger percentage of your portfolio into equities but that is easier for a younger investor than for someone near or at retirement.
An alternative could be looking at a fixed annuity. Why?
An annuity is a contract offered by an Insurance Company. Fixed annuities have grown in popularity because they typically guarantee principle and offer higher rates when compared to other safe alternatives. It is not uncommon to see a rate around 3% for a 5-7 year fixed annuity. Some would ask: why expose your capital to the risk of bonds when you can get a comparable rate without the bond risk? Fixed annuity contracts typically state your rate for a number of years; if you cancel or surrender your policy before maturity there will be a penalty on your growth and/or principle. Annuities come in many shapes and sizes and it will be important to work with an agent that is trustworthy and knowledgeable.
Time for the final bell of 2015. 2016 will likely be the beginning of changing rates. It has been a long time since we have experienced rising interest rates. Current bond values will likely change to the downside, how much, it is hard to know. This does not mean you should not hold bonds in your portfolio, but diversifying some of that capital into a fixed annuity could be a good complement to your current strategy.
Jonathan M. Clark is an Investment Advisor Representative, www.clarkwealthadvisor.com Investment Advisory Services offered through Brookstone Capital Management LLC, an SEC Registered Investment Advisor. Index or fixed annuities are not designed for short term investments and may be subject to caps, restrictions, fees and surrender charges as described in the annuity contract. Guarantees are backed by the financial strength and claims paying ability of the issuer.