Damien Couture

If Interest Rates Rise, What Happens to Bonds?

August 5, 2012 by Damien Couture Leave a Comment

With so many investors piling into bonds and bond funds I thought it would be a good idea to comment on the risks this might entail going forward. Investors in longer-term Treasuries could be in for a rocky road ahead. We have seen an epic “flight to safety” the last few months. In April alone, $20.6 billion moved into bond funds, according to Lipper. In the same month, $12.7 billion left stock funds (which marked the 12th consecutive month of net withdrawals).¹

The price of debt has really gone up, particularly U.S. and German sovereign debt. On June 1, the 10-year Treasury yield settled at 1.47% after touching an all-time low of 1.44%. It has consistently been below 2% since April 26. Germany’s 10-year notes were yielding around 1.2% during early June.^1,2,3 What do these historically low rates mean for bond returns going forward? In the short term, few expect the current bond market climate to change. The question is what happens when it does and rates start to go back up?

Are bond investors going to pay for it? At some point, interest rates will rise again and when rates go up bond prices go down. When that happens, how many bond owners are going to hang on to their 10-year or 30-year Treasuries until maturity? Who will want a 1.5% or 2.5% return for a decade? If you have to sell a bond before its maturity you get the market value. Bond funds are priced everyday so they will reflect the lower value of the bonds in the funds’ share price right away. If the federal funds rate rises 3%, a longer-term Treasury might lose as much as a third of its market value as a consequence! It wasn’t that long ago – June 12, 2007, to be exact – when the yield on the 10-year note settled up at 5.26%.²

What if you want or need to stay in bonds? In my opinion, avoid U.S. Treasures. There is still good value and much higher yields in municipal, high yield corporate, floating rate and certain international and emerging market bonds. Moving into shorter duration bonds can also help protect bond values if rates go up. Be sure to explore how exposed your international bond funds are to EU nations in trouble. According to Morningstar data from early June, global bond funds have an average exposure of 2.1% to Spanish, Greek, Italian and Irish bonds. There are exceptions: in early June, some bond funds had anywhere from 7-11% exposure, believing that the high yields of these bonds are still worth the risk.¹

Appetite for risk may displace anxiety faster than we think. Why would people put their money into an investment offering a 1.5% return for 10 years? In a word, fear. The fear of volatility and a global downturn is so prevalent that many investors are playing “not to lose” and are piling into “safe” bonds. However, should interest rates rise sooner than the conventional wisdom suggests, owners of long-term bonds might find that these “low risk” bonds have more risk than they imagined.

www.reuters.com/article/us-europe-bonds, 6-4-12
www.treasury.gov/resource-center/data-chart-center/interest-rates, 6-6-12
news.investors.com/article/bond-prices-slide-as-talk-of-easing-hurts-safety-bid,6-6-12

Damien helps individuals invest and manage risk. He is a Certified Financial Planner™ professional and a principal of Walnut Creek Wealth Management. These are the views of Damien Couture, CFP^®. Investing in mutual funds is subject to risk and loss of principal. There is no assurance or certainty that any investment strategy will be successful in meeting its objectives. Investors should consider the investment objectives, risks and charges and expenses of the fund carefully before investing. The prospectus contains this and other information about the funds. Contact Damien Couture at Damien@walnutcreekwealth.com or (925)280-1800 x 101 to obtain a prospectus which should be read carefully before investing or sending money. Your comments are welcome.

How Fast the Markets Recover

July 7, 2012 by Damien Couture Leave a Comment

As we find ourselves in the middle of yet another market downturn I thought it would be a good idea to review the incredibly resilient history of the stock market. You might be surprised at how fast the stock market can change … for the better. Let’s look at how the market has recovered remarkably – and quickly – from some notable downturns.

2008-2009. The collapse of the subprime mortgage markets triggered a recession and made 2008 the poorest year for stocks since 1931. The Dow Jones Industrial Average fell 10% in June 2008 and fell 10% again in October 2008, losing 19.12% for the year. On March 9, 2009, the major U.S. indices closed at 12-year lows with the S&P 500 at 676.53.1,2,3

Then the market took off. Investors who swore off stocks in early 2009 lost out on one of the great rallies. From the March 9 lows to the end of 2009, the S&P 500 soared 64.83% while the NASDAQ gained 78.87% and the Dow gained 59.28%.4

2001-2002. After the four-day closure of the stock market following 9/11, the Dow fell 685 points to 8,920 on September 17. It kept falling, losing 14.26% in a week to close at 8,235 on September 21. But what happened next? A huge gain. The Dow closed 2001 at 10,021 – a 21% rebound in less than three months.5

There were more challenges ahead. On October 9, 2002, the Dow had fallen to 7,286. But on Halloween, the Dow sat at 8,397 – a 10.6% gain in 22 days.5 As for the people who panicked and bailed out of the stock market, they ended up kicking themselves: in 2003, the DJIA gained 25.3%, the S&P 500 26.4%, and the NASDAQ 50%.6

1987. October 19 was Black Monday: in a contagion of selling exacerbated by unchecked computer technology, the Dow lost 22.6% in one day, falling to 1,738, a 508-point loss.7 (That would be akin to a 2,400-point one-day drop today.) The S&P 500 lost 20.4%.8 By comparison, the initial “Black Monday”, the stock market crash of 1929, represented a 12.8% market loss.9

Then the recovery kicked in. During the next two trading days, the Dow gained nearly 300 points – and it closed 1987 at 1,939, gaining back all of the loss and ending up 2% for the year.10 By January 1990, the DJIA was at 2,800.11
1974. With investors fretting over rising inflation and the energy crisis, the Dow loses 30% of its value during the first three quarters of the year. Suddenly, the Dow gains 16% in October.12 In early December 1974, the Dow is at 577; in July 1976, it hits 1,011.5

1982-2000. On August 12, 1982, the Dow was at 777. On January 14, 2000, it was at 11,722.98. That’s a 1,500% gain in 17½ years.13

The “two steps forward, 1 ½ backward” environment we find ourselves in has been extremely frustrating, particularly for short-term investors. Long-term investors, however, are in a position to take advantage of the drop in stock prices. Take comfort in the fact that, while there are always periodic descents, history is definitely on a patient investor’s side.

1. cnbc.com,12-31-08 2. allheadlinenews.com, 1-3-09 3. money.cnn.com, 3-9-09 4. cnbc.com, 12-31-09 5. the-privateer.com, 6-30-08 6. upi.com/Business News, 12-31-2003 7. sfgate.com, 10-18-07 8. foreignpolicy.com, 10-2007 9. money.cnn.com, 10-26-0
10. articles.moneycentral.msn.com/Investing/Dispatch/BlackMonday20YearsAfter,10-19-07 11. answers.com/topic/closing-milestones-of-the-dow-jones-industrial-average, 7-3-08 12. money.cnn.com/2008/06/27/markets/bear_market.moneymag, 6-27-08
13. answers.com/topic/closing-milestones-of-the-dow-jones-industrial-average, 7-3-08ww.montoyaregistry.com, www.marketinglibrary.net

Damien helps individuals invest and manage risk. He is a CERTIFIED FINANCIAL PLANNER™ professional and a principal of Walnut Creek Wealth Management. These are the views of Damien Couture, CFP® and should not be construed as investment advice. Investors cannot invest directly in an index. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Not all recommendations are suitable for all investors. Each investor must consider their own goals, time horizon and risk tolerance. Your comments are welcome. amien can be reached at 925-280-1800 x101 or Damien@WalnutCreekWealth.com.

Market Watch – The 2 Biggest Retirement Misconceptions

June 10, 2012 by Damien Couture Leave a Comment

While the idea of retirement has changed, certain financial assumptions haven’t. We’ve all heard about the “new retirement,” a mix of work and play with the modern retiree leading an active lifestyle. While this is becoming a cultural assumption among baby boomers, it is interesting to see that certain financial assumptions haven’t really changed with the times. In particular, there are two financial misconceptions that we can fall prey to – assumptions that could prove financially harmful to your future.

Misconception #1 – Assuming retirement will last 10-15 years. Historically, retirement has lasted about 10-15 years for most Americans. The key word here is “historically”. When Social Security was created in 1933, the average American could anticipate living to age 61. By 2005, life expectancy for the average American had increased to 78.¹

In 2010, the American Academy of Actuaries says that the average 65-year-old American male can expect to live to 84½, with a 30% chance of living past 90. The average 65-year-old American female has an average life expectancy of 87, with a 40% chance of living past 90.² With all the advancements in medicine, we could see this boost in overall American longevity to continue. The bottom line: every year, the possibility is increasing that your retirement could last 20 or 30 years—or longer. So assuming you’ll only need 10 or 15 years worth of retirement money could be a big mistake and most don’t realize how much retirement money they may need. This leads us to the next big misconception:

Misconception #2 – Assuming too little risk. Our appetite for risk declines as we get older, and rightfully so. Yet there may be unintended consequences of becoming too risk-averse. Holding onto your retirement money is certainly important, but so is your retirement income and quality of life. In addition to longevity risk, three major financial issues that can affect your retirement over time are taxes, health care costs and inflation.

Will the minimal inflation we’ve seen at the start of the 2010s continue for years to come? Don’t count on it. Over the last few decades, we have had moderate inflation (but sometimes worse, think late 70’s and early 80’s). Over time, even 3-4% inflation gradually saps your purchasing power. Your dollar buys less and less. Taxes will likely be higher in the coming decade. So whether you are 20, 40 or 60, tax reduction and tax-advantaged investing will take on even more importance. Health care costs are climbing – we need to be prepared financially for the cost of acute, chronic and long-term care.

As you retire, you may assume that an extremely conservative approach to investing is mandatory. But given how long we may live – and how long retirement may last – some growth investing could be an important consideration in an overall income strategy.

1. nytimes.com, Week in Review, 4-27-2008
2. usatoday.com, Money, 4-30-2010

Damien helps individuals invest and manage risk. He is a Certified Financial Planner™ professional and a principal of Walnut Creek Wealth Management. These are the views of Damien Couture, CFP^®and should not be construed as investment advice. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Not all recommendations are suitable for all investors. Each investor must consider their own goals, time horizon and risk tolerance. Your comments are welcome. Damien can be reached at 925-280-1800 x101 or Damien@WalnutCreekWealth.com.

A Lost Decade?

May 1, 2012 by Damien Couture Leave a Comment

The last ten years or so have been widely referred to as the “lost decade.” In many ways this term does accurately reflect our economic and financial market struggles since the year 2000. We have experienced unthinkable terrorist attacks, painful stock market declines, ongoing wars in the Middle East, and the worst financial crisis since the Great Depression. No argument here that the last 10-12 years have been an extremely tough environment for many Americans and a very frustrating and challenging time to be an investor.

Despite all these struggles, there have been some very positive developments over the last decade that may provide better economic growth ahead. One of the most important achievements during the last decade has been the extraordinary growth and maturation of the emerging world economies. Today’s emerging economies like China, India and Brazil have gone through a significant transformation the last decade. No longer are their economies totally reliant on exports. They are evolving into more self-sufficient contributors to world economic growth. This is being driven internally by the growing middle classes who now are able to buy all the nice things that we take for granted here in the U.S. Back in 2000, the Gross Domestic Product or GDP (a measure of total economic output) for the emerging economies of the world was only 60% of the U.S. GDP. Today, emerging economies GDP has grown to represent 130% of U.S. GDP.¹

Another positive trend over the last decade is the incredible technological and productivity gains here in the U.S. This “tech boom” has lead to record profits for U.S. companies. We have also seen worldwide growth in the popularity of capitalism during the last 10 years. Technology has allowed the world to become smaller and more interconnected. For many around the globe the increased connectivity with the rest of the world has lead to a realization that capitalism and free-markets, although not perfect, are the best way forward. This in turn has promoted the fall of dictatorships and an increase in individual economic freedom for many people throughout the world. The end result is the most diversified global economy ever seen.

So maybe the last decade was not a total loss? Our investment decisions going forward are going to be greatly influenced by the dynamic changes taking place all over the globe, particularly those over the last ten years. Now more than ever investors must embrace a global mindset when making plans.

Wells Capital Management, Economic and Market Perspective, 2-2012

Market Watch – Time to Rebalance

April 4, 2012 by Damien Couture Leave a Comment

Investor optimism has risen a bit lately and it is easy to see why. The world’s equity markets have rallied quite dramatically since October of last year. While such positive sentiment is by no means unanimous, optimism clearly is climbing. This is hardly a surprise given such strong gains over the last few months. Of course, there is considerable debate over the staying power of this bull market. I don’t know what the future holds, but I feel now would be a good time to consider rebalancing your accounts.

The process of rebalancing forces an investor to sell high and buy low. Many people recommend rebalancing on regular intervals. Some say to do it at least annually and some as often as quarterly. I believe it is better to let the market tell you when to rebalance. I preferred to rebalance after we have seen a sustained period of either strong or weak returns in the markets. This helps keep the risk level of your portfolio consistent with your plan and avoids being overexposed to stocks before a downturn or being underexposed during an upturn. Think of the markets like you do your health. When are you most likely to catch a cold? After a sustained period of good health. When do you get better? After you have been sick a while. Markets are not much different.

Let’s take a simple example from the last few months; suppose an investor’s portfolio stood at $1,000,000 just a few months ago on October 1, 2011 and on that day the investment mix was right at their risk targeted allocation of 60% stocks (represented by the S&P 500 Index) and 40% bonds (represented by the Barclay’s Capital Aggregate Bond Index). By the end of February 2012, only five short months, the strong relative performance of stocks over bonds would have increased the stock allocation to 64% and resulted in a portfolio value of $1,132,168. That’s an over 13% gain in just five months! While it is always nice to enjoy positive returns like this in a short period of time, it is also an appropriate time to consider rebalancing. Taking profits on the stock portion and reallocating it to lower risk bonds in this example would make sense for an investor concerned with maintaining a consistent risk level in their portfolio.

Clearly, it is important to review your mix of assets from time to time. Rebalancing the mix back to an appropriate level will help an investor guard against being over or under exposed to equities at the wrong time. This is especially important at moments like now when optimism has increased and everything is beginning to feel fine.

Damien helps individuals invest and manage risk. He is a Certified Financial Planner™ professional and a principal of Walnut Creek Wealth Management. These are the views of Damien Couture, CFP^®and should not be construed as investment advice. Rebalancing may be a taxable event, before taking any specific action be sure to consult with your tax professional. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Not all recommendations are suitable for all investors. Each investor must consider their own goals, time horizon and risk tolerance. Your comments are welcome. Damien can be reached at 925-280-1800 x101 or Damien@WalnutCreekWealth.com.

Retirement Risks – Beware of Them All

March 10, 2012 by Damien Couture Leave a Comment

What is risk? If you ask most investors, they would tell you that risk is the chance that an investment will go down in value. But this is only one type of risk – market risk. Investors face several other additional types of risk in retirement. These risks, if not addressed, can chip away at your retirement savings. Unfortunately, most retirement savers are far too fixated on market risk and do not pay close enough attention to the other types of risk.

Market risk is the chance that an investment’s actual returns will be different than expected due to overall price fluctuations in the market. Under this definition of risk, equities have the most risk and cash has the least. Market risk, however, is not the only risk out there for retirement savers.

What about the chance that you might not have enough set aside to meet your retirement spending needs, a savings shortfall risk? This can be compounded by retiring too early and/or spending too much in retirement. Longevity risk is the chance you will live much longer than expected and outlive your savings. Inflation risk is the chance that inflation will erode the purchasing power of your savings. In all of these cases, the “riskier” asset is cash and the “safer” asset is equities. Other risks to watch out for include legislative risk, the risk of law changes to taxes, pensions, Social Security and Medicare. What if someone dies early or becomes disabled? Fire consumes your home? What if you get sued? Catastrophic events risk is often overlooked and can be hedged with insurance and proper estate planning.

Investors need to rethink the concept of risk and how it can change over different life stages. As a young saver you have time on your side and many years of future income to put toward retirement savings. Market risk should not be a big concern. The bigger risk at this stage is the savings shortfall risk. You should invest for high returns and make sure you are getting a savings program going.

Savers in midlife can also accept high levels of market risk. They still have very long time horizons and many future years of income and contributions. They should still seek higher returns and watch that they are saving enough to avoid a shortfall. They should reduce their market risk as they near retirement.

Once retired you have no more future income to fund contributions and must now shift your focus to balancing market risk with longevity and inflation risk. This still requires seeking attractive returns and maintaining a healthy equity exposure. Longevity is the greatest risk for new retirees.

A senior retiree has likely spent down some of their retirement savings and needs to focus more on minimizing losses while at the same time generating returns that keep pace with inflation. Now is the time to pay attention to market risk yet balance it against the risk of losing purchasing power.

Damien helps individuals invest and manage risk. He is a Certified Financial Planner™ professional and a principal of Walnut Creek Wealth Management. These are the views of Damien Couture, CFP^®and should not be construed as investment advice. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Not all recommendations are suitable for all investors. Each investor must consider their own goals, time horizon and risk tolerance. Your comments are welcome. Damien can be reached at 925-280-1800 x101 or Damien@WalnutCreekWealth.com.

Five Tenets for Investing

January 29, 2012 by Damien Couture Leave a Comment

As Yogi Berra taught us; “It’s tough to make predictions, especially about the future.” We are living through some tumultuous times. The world gorged on debt and times were good. Now we are paying the price for this excess and are in the midst of a painful worldwide de-leveraging process. Nobody knows how long this economic malaise will last. Should we be pessimistic or optimistic? Time will tell. Nonetheless, I feel strongly that betting against the progress of human history and innovation has always proven to be a losing proposition over the long run. Yes, in the short run, there are times to be cautious. The last five years confirm that. But circumstances change. Markets and economies are cyclical. Economic growth and positive investment returns follow contraction and investment losses just as day follows night.

So how do we invest in this crazy world and keep our sanity? There is really no secret or magic formula. Below are some fundamental guidelines for investing that I believe can guide you through any type of market. The information age we live in has made investing more complicated and confusing than ever. Individual investors are bombarded with an information overload on a daily basis. My advice is to turn down this “white noise” by doing the following:

Know and keep your objectives in place, only altering them when circumstances force a change. Consider adhering to my Five Tenets for Investing:

Invest with a plan. Sounds basic enough but have a specific plan and time frame for your money.

Diversify. Invest globally and maintain exposure to a variety of asset classes.

Invest with a professional. Get some help. A professional can help you put a plan together to reach your goals and manage risk. More importantly, a professional cam help take the emotion out of investing by injecting some rational thinking and perspective. This is crucial during downturns.

Invest continually. Up or down markets, keep reinvesting and adding to those accounts.

Have patience. Probably the most important tenant of all. The biggest pitfall I see for investors of all ages is not sticking to their plan. Too often, investors change the direction of long-term plans by making short-term decisions based on emotion. Decide if you are an “investor” or a “trader.” Investing should only be undertaken with a long-term time horizon.

Damien helps individuals invest and manage risk. He is a Certified Financial Planner™ professional and a principal of Walnut Creek Wealth Management. These are the views of Damien Couture, CFP^®and should not be construed as investment advice. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Additional risks are associated with international investing, such as currency fluctuations, political and economic stability and differences in accounting standards. Not all recommendations are suitable for all investors. Each investor must consider their own goals, time horizon and risk tolerance. Your comments are welcome. Damien can be reached at 925-280-1800 x101 or Damien@WalnutCreekWealth.com.

2012 – Will the Tug of War Continue?

December 31, 2011 by Damien Couture Leave a Comment

I don’t believe we can think about what 2012 might hold for us without first reviewing what took place during 2011. It seems we have been caught in a tug of war of sorts between positive and negative forces over the last several months and it is likely that this tug of war is not over and will continue well into 2012.

First let’s look at the positive side. Despite all the negative sentiment out there, it is not all bad news when it comes to the economy and the financial markets. I would consider some of the following as positives to keep in mind:

The U.S. economy has been fairly resilient and it does not appear that we will slide back into recession.

We have a very accommodating monetary policy. The Fed is expected to keep interest rates low for a considerable period of time.

Corporate earnings continue to be very strong.

Stock valuations appear very attractive by many measures. P/E Ratios are at the low end of their range the last 20 years. Many high quality stocks pay dividends that are higher than long-term Treasury bonds.

As of this writing in early December, retail sales have been strong during the holiday season.

Nobody is buying stocks. According to ICI data, investors have pulled money from equity funds for seven straight months. Fund flows tend to be a pretty good contrarian indicator. When everybody is buying stocks they are usually headed for a fall and periods of outflows tend to be indicative of market bottoms.

But don’t get too excited. There are a number of negatives counterbalancing the positives:

The European debt crisis is far from over. It will almost certainly throw Europe into a recession this year and it poses a severe threat to the banking system.

The majority of the developed world countries have massive debt issues and an aging demographic problem.

2012 is an election year and we already have a massive amount of political discord and uncertainty. The super committee was a total failure.

Unemployment is expected to stay high. Even though the U.S. economy is growing, we are simply not growing fast enough to create enough net new jobs to solve the problem.

The Fed, as well as other central banks worldwide, may be running out of options to combat our economic malaise.

Nobody knows for sure how all this will play out. Maintain balance in your portfolios. Stay diversified. Most importantly, stay patient. It may take a while for this tug of war to end.

Damien helps individuals invest and manage risk. He is a CERTIFIED FINANCIAL PLANNER™ professional and a principal of Walnut Creek Wealth Management. These are the views of Damien Couture, CFP® and should not be construed as investment advice. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Not all recommendations are suitable for all investors. Each investor must consider their own goals, time horizon and risk tolerance. Your comments are welcome. Damien can be reached at 925-280-1800 x101 or Damien@WalnutCreekWealth.com.

Rethinking Retirement

December 4, 2011 by Damien Couture Leave a Comment

It is no secret that the investment landscape has changed significantly over the last few years. We are witnessing a sea change to many of the traditional investing principals of years past. The financial markets are more dependent than ever on the coordinated actions of policymakers around the world. No longer can we totally rely on fundamental company and economic analysis to make investment decisions. These can still be valuable, but pale in comparison to the role governments around the world are taking in trying to get the policy decisions correct. In this environment, economic growth and investment returns are expected to be below their long term averages for the foreseeable future. With all this going on, now is an important time to rethink your retirement plans.

Many consumers planned on their home values being a significant contributor to their retirement. This is not going to happen for most. The combined effect of lower housing values, investment declines, longer life expectancies and the prospect of low returns going forward make this a real game changer when it comes to retirement. Most consumers are going to have to work longer, save more…a lot more, and be more realistic about their spending and rates of withdrawal during retirement.

Working a few more years can have a tremendous impact on your long term retirement success. Every extra year you work is one less year you have to support yourself in retirement and one more year of additional savings toward retirement, a powerful double whammy. If the rates of return on our retirement savings are going to be below average then we simply will need to save more. Consider a simple example; assuming you could earn a static 6% annual rate of return you would need to save $1,021 per month for 30 years to accumulate $1 million in a tax-deferred account, like an IRA or 401(k). A 20-year period would require you to save $2,195. Better get going!

So let’s assume you accumulate a $1 million. Great! That’s a lot of money. But how much income will that reasonably provide someone during a 25-30 year retirement? Less than most think. The general consensus among financial advisors is that retirees should plan on a portfolio withdrawal rate of 4% to 5%. This is the percentage of the portfolio’s value that is withdrawn in the first year of retirement. The amount is also assumed to be increased each year for inflation. So, if you have $1,000,000 saved you can reasonably expect to have that account support a draw of $40,000 to $50,000 per year plus inflation for a 25 to 30 year retirement period. Doesn’t seem like much does it? We all need to rethink retirement!

Damien helps individuals invest and manage risk. He is a Certified Financial Planner™ professional and a principal of Walnut Creek Wealth Management. These are the views of Damien Couture, CFP^®and should not be construed as investment advice. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Not all recommendations are suitable for all investors. Each investor must consider their own goals, time horizon and risk tolerance. Your comments are welcome. Damien can be reached at 925-280-1800 x101 or Damien@WalnutCreekWealth.com.

Attractive Opportunities in Emerging Market Bonds

November 6, 2011 by Damien Couture Leave a Comment

We are all too familiar with the economic headwinds facing the U.S. and Europe. The larger, more mature economies of the U.S. and Europe are being held back by low growth, high unemployment, housing downturns and massive deficits. Most economists don’t see this changing much in the coming quarters. The consensus seems to be that the possibility of a recession has risen. Barring a recession, most pundits predict slow growth as their best case scenario. So how do we invest in this environment? I would suggest investors take a look at emerging market bonds.

The economic outlook for many of the smaller, less developed economies – the so called emerging markets – is much different. hese regions have much better growth rates, trade surpluses, favorable demographics and lower deficits. This economic outperformance is expected to continue. One byproduct of this better economic backdrop is a favorable bond market environment. In countries like Brazil, Chile, Mexico, South Korea and Australia, to name a few, interest rates are higher and real yields (average bond yields minus inflation) are positive. The currencies of these more dynamic economies are also expected to appreciate against the U.S. dollar, the euro and the British sterling.¹

Contrast that with the bond market here in the U.S. and Europe. We have record low interest rates on our government bonds and real yields have turned negative in 2011.¹ These low yields point to an environment of very low returns on government bonds going forward. In addition, our massive deficits most likely will necessitate a decline in currency valuations over time In short, not a lot on the upside going forward.

In summary, the economic conditions here in the U.S. and Europe are expected to languish. But this is not true everywhere. Yet, many investors do not have any international bond exposure. I would take a look at the composition of your bond allocations. Consider overweighting the bond markets and currencies of the faster growing emerging markets and reducing exposure to bonds in U.S. and European markets. Be sure to look for bonds that are un-hedged to the U.S. dollar. In this environment you want the currency exposure for additional appreciation potential.

1.Wells Fargo Funds Management, Investment Perspectives, International Fixed Income, 10-2011
Damien helps individuals invest and manage risk. He is a Certified Financial Planner™ professional and a principal of Walnut Creek Wealth Management. These are the views of Damien Couture, CFP^®and should not be construed as investment advice. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Additional risks are associated with international investing, such as currency fluctuations, Political and economic stability and differences in accounting standards. Not all recommendations are suitable for all investors. Each investor must consider their own goals, time horizon and risk tolerance. Your comments are welcome. Damien can be reached at 925-280-1800 x101 or Damien@WalnutCreekWealth.com.