Author: Ben Johnson

Increasingly at Highland, we are communicating with clients digitally rather than in person, as the options and channels for keeping in touch multiply. Email, social media, newsletters, blogs, video chat, and phone calls are substituting for the old-fashioned, face-to-face meeting. It turns out we’re not alone. This report found fewer in-person meetings...

In America’s new Gilded Age, the top one percent owns 40 percent of the nation’s personal wealth.  The next nine percent owns 35 percent of the wealth, and the remaining 90 percent of the population splits the 25 percent that’s left.  The current income disparity surpasses even that of the...

The saying “picking up nickels in front of a steamroller” is a good metaphor for what it’s like to buy bonds today.  June 2013 was especially painful for virtually all types of bonds and serves as a reminder for how fast they can fall.  While the sell-off was likely overdone near term, most bonds remain very expensive if one believes in regression to the mean.

Here’s the dilemma: nobody knows when the tide will turn.  What we do know is strategies that have worked well in the past, such as individual bond ladders, bond index funds, and typical “core” bond mutual funds, are all at high risk of earning less than inflation for years to come.  Despite these hurdles, investors can achieve positive real returns if they are willing to approach this asset class differently than they may have in the past.

Spend Risk Wisely

To be successful and preserve wealth, one has to take risks.  The key is spending your risk budget in a way that rewards risk taking rather than penalizes it.  With the combination of historically low rates and an improving economy, it’s time to invest defensively on maturity, offensively on credit, and capitalize on niche opportunities that still offer value.  Emphasizing active bond managers that are specialized, nimble, and proven is also critical to navigating these waters.  This approach is not expected to increase risk; rather, it optimizes the potential return by changing the composition of the risk.

Risks to Avoid / Reduce

Risks to Accept

Interest Rate Risk

Credit Risk

Purchasing Power Risk

Currency Risk

Reinvestment Risk

Credit Spread