Weekly Market Update October 28, 2022, Dow Jones Industrial 32,861 +2.6%, S&P 500 3,901 +2.5%
Nasdaq Composite 11,102 +2.9%, US Ten Year 4.01%
Investing In 2022 - Nowhere to Hide? Not so Fast – We Have An Answer
Markets, both fixed income and equities, have been an ugly place to be in 2022 – period. Even with the last months’ ~7% rally, the S&P 500 is down 18.1% YTD, and down 15.1% in the last year. And bonds have been no picnic either, with the Vanguard Total Bond Market Index Fund down 16.7% YTD, and down 17.3% over the last year. The past year’s events (inflation, supply chain, rate hikes, geopolitical issues just to name a few) have turned all the traditional financial levers on their heads. Bonds, which typically represent a haven when equities are weak, have not provided any cushion to equity owners.
I often hear commentary from customers to the tune of “right now, there’s nowhere to hide, so I think the best thing to do is sit in cash.” The problem with this is that NOT choosing to act IS an active decision. Owning cash as a position IS an investment choice; choosing to sit on the sidelines IS an active investment selection. And this investment selection, given where inflation is (8.3% CPI in August) erodes the purchasing power of your cash. Using this number, in ~8.7 years, your cash will be worth ½ of what it is today ($100,000 will only have purchasing power of $50,000 after inflation erases the cash’s value).
I’ve Got Cash/Cash Equivalents, But Not Comfortable With Equities
Concern over equities is certainly understandable and justified given the market’s recent performance. However, the recent rate hikes have presented investors an opportunity to take advantage of short-term rates we haven’t seen in OVER 15 YEARS. The chart below shows the yield on a 2-year government bond since 2006.
Take a BITE out of inflation
One strategy that serves the purpose of capital preservation, provides safety of return, access to liquidity in case of a rainy day, and removal of interest rate risk is a short-term treasury bond ladder strategy. The term “ladder” just means buying different bond maturities (the rungs are the maturities). Below I will outline a strategy that builds out a very basic one-year bond “ladder,” and quantify what that means for your wallet.
From the chart above, you can see the Yield of 3, 6, 9 and 12-month T-Bills. The “tax equivalent” yield adjusts this yield based on the state income tax rate (in owning US government bonds, you do NOT pay state income tax rates - I used 10.75% for New Jersey, because, well that’s where I live). In this example, if you were to invest $25,000 in each of the above securities, you would get an annual tax equivalent yield of nearly 5%.
Are US Treasury Bonds Safe?
Short answer, YES. The U.S. government has NEVER missed a debt payment. And, as we all know, the government has the power to raise taxes to meet debt requirements. U.S. Treasuries, in a nutshell are defined as “riskless” securities (INVESTOPEDIA).
Is There Interest Rate Risk? (Will My Holding Lose Value If Rates Go Higher?)
If you know what your investment horizon and cash needs are, and you purchase bonds that mature before this cash need arises, then you are “immunized” against interest rate risk. For example, if you own a 6-month T-Bill, and interest rates go up 5%, the value of that bond (trading in the market) will decline. But if you hold this bond to maturity, you get your investment back plus the interest, and what happened to rates while you own the bond really doesn’t matter – you’re protected against fluctuations in rates by holding to maturity. And as bonds mature, you will simply reinvest those funds in a higher yielding bond to replace the “rung” on the ladder that just matured.
What Are The Highest Yielding Banks Paying Right Now?
According to Nerdwallet.com (as of 10/29/22), LendingClub is currently the highest High-Yield Savings option out there. See the chart below on how this compares to the one-year bond ladder strategy listed above.
As you can see, the dollar differential on a $150,000 account is not insignificant (anywhere between $2,200 and $3,900 in one year).
What if Rates Go Higher – Am I Missing Out on a Higher Yield?
If rates go higher, you will simply reinvest your shortest-term bond when it matures (3-months in our example) into a one-year maturity bond that will then be carrying a higher interest rate. Every three months this can be repeated to take advantage of increasing yields.
I Hate My Banks’ Lower Yield, But I Like My Banking Services
Through Charles Schwab, an account owners have access to a Debit Card, MoneyLink (electronic money transfer), Check Writing, and Bill Pay. It’s effectively a super-charged high-yield banking account. And, if you ever need cash for a rainy day, Treasury Bills are the most liquid securities in the world, and cash can be raised in one day (in certain circumstances even less).
CALL TO ACTION – DE-CLAW INFLATION
If you have cash or cash equivalents, aren’t comfortable the with markets, but don’t want to watch your hard-earned cash erode away in value, then speak to your M&R Advisor TODAY (https://www.mrcapco.com/contact). We can create an account for you that will mute the impacts of the inflation beast, provide you with safe and respectable returns, and give you the peace of mind that you are taking control of your money in an environment where it’s easy to feel lost.
Have a great weekend,
Executive Vice President
M&R Capital Management, Inc.
25 Union Place
Summit, NJ 07901
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