When Rates Begin To Rise, Active Management Is Paramount
Updated: May 24
Passive investing is perhaps the best driver of value when it comes to growing your money over time. Buy a low cost index fund and the only thing you'll need to do is to remember to do nothing; to not think about it. If you followed that route -- and for the longer, the better -- then chances are you've outperformed the vast majority of active money managers over that time, in aggregate. It is the worst kept secret in the capital management paradigm and I hope you've benefited from it. Since 2008, the markets have operated in a vortex of ever cheaper money. It was orchestrated to result in what has ultimately transpired: lower rates across the spectrum to make borrowing cheap to stimulate growth and also to drive investors into capital assets to further stimulate aggregate demand. It's worked beautifully (that is, to capital holders, but if you ask wage earners who don't own capital assets, they would disagree). Stocks are at all-time highs and growth stocks have exploded to a degree that just five technology companies make up over 10% of the S&P 500 index. However in late February we saw an interesting turn of events. The bond market disagreed with Fed chair Jerome Powell's assessment that near term expected inflation is not a concern enough to alter the FOMC's course of continuing to buy $120 billion in short term treasuries every month. What resulted was a a sudden sell off of long dated treasury bonds and a steepening of the yield curve. The Fed, with its continued purchasing of T-bills, will keep near term rates low, but, the market drives the prices of long dated bonds. A steeping curve is a refreshing change, especially considering that just 18 months ago we experienced an "inverted" curve. We don't like inverted yield curves. So, if the curve is steeping, we should be happy right? For the most part, yes. However, if your bond holdings are the same as they have been for, say, over a year, then the gains you've benefited from are going to be the first to give back those gains. Inflation is the topic de jour and inflation is a corrosive element to interest bearing investments. Especially is the case as it pertains to record low yields. Convention holds that bonds are "less risky" than stocks. That's a misnomer. The bond market is multitudes larger than the stock market, and within it, the risk spectrum spans broadly. Safety within the bond market can be found as long as your manager understands the space and is able to identify bond characteristics to effectively minimize capital losses as rates rise. Owning bond funds, which has been a source of serendipity to savers of late, will likely be responsible for the bulk of your portfolio's loss for 2021 and perhaps 2022. Please contact us here at Risemint Capital Advisors. Our actively managed bond accounts are positioned around maximizing preservation during this time. And it could serve your portfolio significantly.