The typical seesaw relationship between stocks and bonds has been flipped on its head, with historic losses in both sending investors into a tailspin.
The knee-jerk reaction might be to pull money out of stocks and bonds and stuff fistfuls of cash under the mattress instead. But financial planners say even the current economic downturn offers investing opportunities; they just might not be what you’d expect.
Take, for instance, short-term treasury bonds. These government-backed securities are often a small but uninteresting part of a client’s portfolio; there’s minimal risk, but also usually minimal return.
Not anymore.
Interest rate hikes have driven up the yield on short-term treasury bonds to 4.5% as of mid-October – the highest return since the 2008 recession.
“We’ve just never seen short-term interest rates so high,” said Peter R. Phillips, senior vice president and chief investment officer for Washington Trust Wealth Management, an arm of Westerly-based bank
The Washington Trust Co. “It can be a good place to kind of park some of your money.”
Washington Trust hasn’t yet shifted more of its clients’ money into short-term government bonds, which it usually does by way of money market funds rather than direct treasury investments.
But it’s made it easier for Phillips to persuade clients to invest even a small amount into these types of fixed assets.
“Maybe last year you begrudgingly said OK when the market was still going up, but there was some risk on the horizon,” Phillips said. “Now, in hindsight, you see it worked, that you can get a return on that investment.”
Phillips thought it was still too early to start shifting clients’ assets around. But others are making moves.
That includes Jason Siperstein, president of
Eliot Rose Wealth Management LLC in West Warwick.
As interest rates approached 0% at the beginning of the pandemic, the firm cut in half the percentage of bond investments in clients’ portfolios. Instead, that money was put into “alternative investments” such as private credit facilities and dividend stocks, which guarantee regular – albeit lower – payments to shareholders rather than the riskier growth stock options.
Now 2½ years later, Siperstein is slowly shifting money away from alternative investments and back into the bond market, focusing on those newly appealing investment-grade bonds, short-term treasury bills and corporate credits.
A gradual shift is the key.
While planners and companies differed in their approaches to the bear market, all agreed that dramatic, emotion-driven investment changes invite financial dangers.
Matthew M. Neyland, chief investment officer for
SK Wealth Management LLC in Providence, likened it to trying to catch a falling knife.
“Investors have a temper tantrum during these kinds of periods,” Neyland said. “It’s very easy to get caught in this trap of ‘do this, do that’ as opposed to just being patient.”
Still, the “generational shift” Neyland saw unfolding in the stock market was going to require some changes in strategy.
“The volatility shocks we’re seeing are much more frequent than in years past,” Neyland said.
These dramatic peaks and valleys, combined with the availability of computer-driven trading products, are redefining the rules around investing.
Neyland said tax-loss harvesting – selling declining assets to offset capital gains taxes – is one example of an increasingly popular investment trend he thinks is here to stay. Certain types of company stocks will also become more appealing, specifically in sectors such as energy and consumer goods that are profitable in various economic climates.
Indeed, while some financial planners are shifting away from the stocks, Gregory M. Young, principal of
Ahead Full Wealth Management LLC in North Kingstown, saw opportunity in the plunging market.
While Young typically advises clients to keep an 80-20 ratio of stocks to bonds, these days he’s pushing a more aggressive strategy of 90% or even 100% equity through exchange-traded and mutual funds.
“The popular opinion is that value investing is dead,” Young said. “I don’t agree. Now is the time to buy, to shorten the max drawdown.”
It helps that Young’s investors are younger, in their prime working years, which aligns with an aggressive investment strategy better than for clients at or approaching retirement age.
But on the flip side, Young said his most “risk tolerant” clients were the few older outliers.
“Our risk tolerance appetite is so caught up in the news headlines, or the way we were raised, more than anything,” he said.
Though Young’s approach differed from some of his counterparts in the industry, he didn’t think one was better than the other. The important thing, he said, is to have a plan and stick to it.
“There’s always going to be some news highlight,” he said. “Good advisers have rules. It doesn’t matter what the rules are, you just have to follow them.”
