An Anniversary without a Celebration

On March 15^th we will celebrate a dubious anniversary at Bond&Devick.  It will be one year since we had our last in-person client meeting in the office.  For a group of extroverts whose favorite part of our job is meeting with clients, giving hugs, and sharing stories, this has been a challenging twelve months to say the least.  We are grateful that our team and families are healthy, and we look forward to the time when we can resume seeing clients again in the office.

Challenges

We entered 2021 with record low interest rates and stocks trading at all-time highs.  Bonds and cash continue to provide very low yields and stocks look due for a correction (which is both healthy and a part of investing).  The current interest rate environment will most likely continue to keep returns from cash and bonds low for the next few years, which means portfolio returns will rely almost exclusively on the returns of stocks for many quarters to come.

Opportunities

Domestic growth stocks and most bonds seem to be expensive, while value stocks and international stocks most likely offer the best opportunities over the next few years for better returns.  We will continue to invest client portfolios within the risk guidelines we have set up for each of you.  Even if we are able to invest portfolios with perfect foresight over the next few years (which we won’t) it will be difficult to achieve the types of returns we have in the past without taking on more risk.  This is especially true for those portfolios conservatively or moderately invested since they have more invested in cash and bonds than more growth-oriented portfolios.  The more traditional, balanced portfolios will struggle until the interest rate environment increases, which is dependent upon economic growth and inflation.  A gentle rise in interest rates over time has often been a good environment for the stock market, however things get dicey when interest rates spike higher and quicker than investors expectations.  Expect heightened volatility in stocks around the economic rebound as we may be entering a period where good news (the economy is growing faster than predicted, unemployment is going down quicker than anticipated) means bad news for stocks, especially if expectations around inflation and interest rates were to increase quickly.

Patience

We will continue to do our utmost to help our clients reach their goals, however the next few years will require patience.  Not only will returns on cash and bonds likely be more subdued, but it is also likely that stock market returns will remain volatile as the global economy recovers from the virus.  We will reallocate portfolios over time as the interest rate environment changes.  For now, we have been increasing allocations to cash and short-term bonds while reducing exposure to long-term bonds as a defensive hedge against rising interest rates.  We do not believe the higher yield for longer term bonds is currently enough to make owning a large amount of those bonds attractive at this point.  After interest rates rise, the risk/reward profile on longer term bonds will look better and we will start adding to these holdings over time.

Over the past 38 years our firm and our clients have benefited from diversified portfolios managed within individualized risk and return objectives.  We believe this approach to investing is timeless and will continue to benefit our clients for decades to come.

The Bond&Devick Team