George Shirley: Any opinions are those of George Shirley and not necessarily those of RJFS or Raymond James
We have been preparing for rising interest rates this year. (We will leave aside that we were also preparing for rising rates last year. And the year before. And the one before that. And the 8 years before that.) But a rising interest rate environment changes the math in regards to many different comparisons between different investments. For a while, we heard that the reason to own stock was because of TINA…(there is no alternative) And when the risk free rate of short term cash is .05%, owning an asset that generates 2-3% could be considered a good risk vs reward trade when compared to the risk free rate of essentially 0%.
But now that we are seeing short term rates in the 1.5% range and the 10 year treasury hovering around 3%, it is worth re-evaluating different assets in the portfolio as compared to the risk free rate. Higher rates present different risks for different asset classes. And when reviewing some of the individual holdings of investment portfolios, we have been asking, what is the purpose of each investment in the investment portfolio? Is this a risk-on asset or a risk-off asset? And how does this complement the other holdings in the portfolio?
We have had a very long-term trend of falling interest rates, and what worked in previous market conditions, may no longer be the best strategy for current and future market conditions. Whether an asset is owned to increase or decrease risk in a portfolio, the current conditions warrant a review of whether that is the best way to accomplish that objective, even if it may be counter to the “historical approach” of portfolio construction. In many portfolios, we have both increased risk and upside with the risk-on portion of the portfolio, while also decreased risk and downside in the risk-off portion of the portfolio without necessarily impacting the overall allocation. With almost every portfolio, there are assets that are likely to be affected differently than they have previously, so now would be a good time to reassess whether an investment is a risk asset or not.
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The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
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