When I wrote my blog post titled The Quiet Rally on Feb. 21 about the historically strong bond market, I had no idea that the bond market would move so quickly to further strength. As I said back then,
However, there are some strong fundamentals currently supporting a continuance of a low rate environment including the strong and rallying dollar, modest and stable U.S. growth with low inflation countered by tepid global growth, as well as external factors like the coronavirus. Alternatively, there seems to be a less convincing case for rates to rise per an accelerating global economy and inflation that seems less likely in the near term.
Since then, the Fed came forward with a special rate cut of 0.50% to help head off negative economic effects emanating from the coronavirus. The 10-year Treasury yield continues to plummet through today at a new all-time low of 0.93%. Global equities are a rollercoaster with 1,000-point up and down days on the Dow becoming commonplace.
So, what now? If you had some fresh cash to invest, where would it go? Is today the right time to enter the market?
In a low rate environment, bonds are always held more for their negative correlation to risky equities than to generate total return. Mathematically, current yield to maturity of a bond is a rough proxy for total return over the duration of the bond, so any allocation to 10-year Treasuries is only likely to return about 1% over the next 9-years! Not a good way to grow a retirement portfolio! Of course, there are other bond classes that offer higher yield and total return potential like investment grade corporates, U.S. high yield bonds, and emerging market bonds, but those investments involve taking some credit risk.
Income-generating equities like high dividend stocks and real estate investment trusts are currently yielding much more than bonds while providing some long-term upside total return potential, but are risky (as we know!!) The FANG stocks were market leaders and certainly have a strong investment thesis, but as we have seen, are susceptible to drawdowns just like any stock.
Warren Buffet, renowned investor, is known to prefer buying when others are “fearful”, so perhaps this is the time to buy? Maybe, except that Buffet’s Berkshire Hathaway is known to currently have their largest cash position in their history at $128 billion!
I refer back to my recent post Invest All-at-Once, or Over Time? where I advocate a methodical dollar-cost averaging approach into an appropriate risk-based globally-diversified multi-asset investment strategy to help smooth out these bouts of market turbulence. This is despite the research that shows “on average”, investing all-at-once produces higher long term returns.