For years Wall Street has used the 60/40 split between equity and bond investments as the rule for retirement.
Not all advisors have done it this way but most have done some type of variation of that.
The idea is that the bonds would be more conservative and although yielding less interest they wouldn’t be as volatile as stocks.
However, in our current market things aren’t looking so good for bonds.
The chart below shows the yield for mortgage backed securities. These are bonds sold into the market backed by mortgages on real estate.
You can see the price crumbling down from January to today.
So what’s happening? The Fed has only raised interest rates by 0.25% but what they have said is they are going to raise rates a bunch more within the next year. So the market is pricing that speculation in.
Rising interest rates are bad for bonds because as rates go up, investors demand more yield from their bond purchase so instead of being happy with say 3.5% now they want 4.5% yield making the old bonds of little demand thus driving the price down.
You can see this in the picture above, the 3.5% coupon is only paying 98.50 (so less that 100%) so investors have to go to a 4.5% coupon to get yield.
It may be time to take a look at your portfolio and dig into the outlook for the bonds you hold.
The hardest part about doing something different is changing the paradigm or status quo.
If you need help modeling this out for yourself, please let us know.
Remember — It’s Your Time…