We’ve identified four factors that are working against investors in the current climate of financial repression. Some, like investors’ own fears, are within their control. Others, like low yields and inflation, require out-of-thebox thinking. But overcoming all four headwinds requires guidance from a trusted financial advisor.
The fear factor
Many investors moved into bonds and cash after the 2008 financial crisis and the ensuing years of market volatility. But it’s impossible to avoid investment risk completely; in fact, by sitting in cash or low-yielding Treasuries, investors are incurring the risk of not meeting their long-term goals (see chart below).
Sovereign-debt yields in core countries have fallen to record lows as bondholders and savers are being quietly forced to pay off the debt burdens of governments. These low yields are insufficient for generating comfortable returns or protecting purchasing power.
Inflation and slow growth
Debt-laden governments are attempting to reduce their debt burdens by, in effect, reducing the value of their national currencies through inflation. This takes a toll on savers—particularly retirees, who depend on income from savings. In addition, economies weighed down by debt are experiencing slow growth, so investors around the world need to look harder to find the growth potential they need.
Markets have grown much more volatile since the financial crisis. Macroeconomic events continue to overshadow fundamentals, creating a roller coaster “risk-on/risk-off” environment. This ongoing volatility may prompt investors to misallocate their portfolios and miss valuable opportunities.
Traditional Income Sources Fall Short Today
CDs, Treasuries and cash are now yielding significantly less than they were in 2006, as shown in this chart of annual income generated from a hypothetical $100,000 investment. Today, stocks and high-yield bonds are more likely to be able to deliver the income your clients need.
Hypothetical income based on yields as of:
- 3-Month T-Bill
- 6 Month CD
- S&P 500
Sources: Bloomberg and Factset. Data as of 12/31/12.
* S&P 500 yields based on past year.