Column: Beware as bonds go bump in the night

By Jason Glisczynski

The traditional balanced investment portfolio will typically have about 60 percent in stocks and 40 percent in bonds.

This structure is common amongst traditional advisors, due to the historical trend for bonds to create ballast and soften the blow when stocks take a dip. This year is one for the record books, with bonds experiencing one of the worst intra-year declines since the 1970s.

This has set up one of the worst years for the 60/40 portfolio design in the last 100 years!

This is a rare event. Stocks have entered bear market status down 25 percent, but stocks do that from time to time. What’s unique about this environment is that bonds have not done a good job of offsetting stock declines as they have historically. The primary driver of this rare market condition is the speed of the rate increases by the Federal Reserve, which has been much faster than what we have seen in the past.

A direct result of this significant push on rates is a spike in the value of the U.S. dollar, which is negatively correlated to all the other major asset classes, unilaterally causing significant investment challenges. Today, yields on bonds and U.S. Treasuries are at the highest level in a decade, creating a scenario where investors can capture higher interest rates, with higher forward expected returns. According to Morninngstar’s Fundamental Price to Fair Value analysis, stocks are trading at more than a 20 percent discount to their fair value.

So, the big question is this: What does this mean for investors today?

One of the key components to successful investing is to remove emotions from the investment decision-making process. While this can be very difficult to do, identifying where you are on the emotional investment cycle is the first step towards making smart moves now, when others are making poor choices. One of my favorite quotes from Warren Buffet is, “The stock market is a device to transfer money from the impatient to the patient.” When markets reach the point of capitulation or despondency, that is when the smart money is poised to make moves to capture value from those unable to take the heat and decide to leave the kitchen.

Arguably, the markets may be to the point of capitulation or despondency. We never know for sure until after the fact but succumbing to our emotions at a time when the markets are presenting us with tremendous opportunity is simply something we must not allow to happen.

Jason Glisczynski is co-owner and principal advisor for Silvertree, LLC. Investment Advisory Services offered through Brookstone Capital Management (BCM) LLC, a Registered Investment Advisor. Silvertree, LLC and BCM are separate companies. Visit www.silvertreeplan.com for more information.