Mixed economic signals and investor uncertainty are two interrelated topics we address this week. We explore bond and stock markets that are providing divergent messages. Then, we address a strategy—really a different perspective on what we already are doing—to address uncertainty in conditions like these.
Fears over ‘lowflation’ serve up a bond market surprise. Yields on the 10-year government bond last week touched its lowest since October—at just 2.5 percent. That’s not the result one would have expected, with modestly higher inflation and more robust job growth. Sudden drops in interest rates raise concerns about the health of the global economy. According to Mohamed El-Erian, persistent concerns about the failure of American and European growth to “lift off” have been amplified in recent weeks by spreading worries about ‘lowflation’, that is, inflation that is too low for too long, dampening consumer spending and economic recovery. Financial Times (tiered subscription model).
Schwab Market Perspective: Fighting History? Recent economic developments and the outlook for the rest of the year look encouraging, according to the investment strategists at Charles Schwab & Co., Inc. Most data readings have rebounded nicely from the winter slump. Employment continues to improve, although the weak link at this point continues to be housing. Based on historic tendencies nervous investors may want to hold off allocating new money for a couple of months, although they suggest keeping with a long-term strategy. Trying to time the market has risks on both sides of the equation.
Getting your Buckets in a Row. A concept that has helped some clients sleep better at night is the “bucket approach” for retirement planning, explained in this piece by Morningstar. With the “bucket approach”, investors divide their retirement assets into buckets to serve different purposes. The first bucket is to cover near-term living expenses of one to two years. With the first bucket in place, you can let those longer-term assets fluctuate day-to-day, month-to month as they might, but knowing that probably over time they’ll work harder for you. The second bucket will contain some intermediate-term assets, and generally provide a conservative mix of stocks and bonds. These assets could be next in the queue; once bucket number one is depleted you replenish bucket number one from the second bucket, which hold assets to be used over the next 3-10 years, depending on client preferences. The third bucket is the long range one—assets invested mostly in equities that would cover you in years 10 and beyond of your retirement.
And in case you missed it, click here to read last week’s blog post which discusses the impact of recent federal policy & caring for aging parents.
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J. Mark Nickell & Co.
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