How do you think about wealth? Ask yourself that question and consider whether your portfolio is aligned with your answer. In our second episode of Trends with Benefits, I catch up with Steve Blumenthal, Executive Chairman and Chief Investment Officer of CMG Capital Management, at the 2020 Inside ETFs conference and ask him the same question. Our discussion touched on the state of current markets, the “mother of all debt bubbles” and the implications for investor portfolios in the years to come.
Rethinking the Rules of Portfolio Construction
What stood out to me from our discussion is that old rules of thumb about lifecycle portfolio construction have to be rethought. In normal markets, the basic approach is to bias your portfolio to stocks when you are young. Then, as you get older and closer to retirement, you start to shift your portfolio to bonds. Bonds tend to be less volatile than stocks and generally, will give you a better chance protecting the value of the money you’ve accumulated. Plus, the inclusion of bonds is typically intended to provide income during retirement. But, these are not be normal times.
The yield on the 10 year Treasury fell below 1.0% this month and inflation last clocked in at 2.5%.1 A long-term to so-called “risk-free” U.S. bonds is simply eating away future purchasing power. Worse, however, is the risk of rising interest rates. As rates rise, bond prices fall and vice versa. For every percentage point that interest rates rise, U.S. 10-year Treasuries could see price declines of roughly 8%.2 While we don’t seem to be in any danger of seeing interest rates rise in the near future, income investors are in a tough spot. This dynamic has driven many investors into other corners of the bond market, like high yield and emerging market bonds, and into dividend-oriented equity strategies.
Watch for the “Epic Opportunity”
Beyond the typical prescription of asset class diversification for risk management, diversification may also come in the form of types of strategies employed. Steve discusses his use of tactical strategies as one form of risk management. The benefit of such strategies is to allow you to take emotion out of decision making and by using well defined rules, help identify sell and buy opportunities.
Virus fears are dominating financial media currently, but if we get beyond this, there’s still a massive debt bubble to contend with, and according to Steve, there’s an “epic opportunity” around the corner for investors who have defended their wealth.
Trend or Fad?
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Follow Ed Lopez @ThatEdLopez and Steve Blumenthal @SBlumenthalCMG on Twitter for real-time updates on the markets and investing.
Important Disclosures 1Source: FactSet as of March 6, 2020.
2Duration measures the sensitivity of bond prices to interest rate changes. It is influenced by a bond’s maturity and coupon rate. The higher the duration, the more a bond’s price will be negatively impacted if interest rates rise. Generally, for every point interest rates rise, a bond will fall in price by the amount of its duration.
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