After years of elevated market volatility, investors have fled to safety, primarily by buying U.S. government debt and other relatively safe-haven investments. In the process, though, they have bid up Treasury prices and decreased yields to virtually nothing.
For investors—particularly those focused on income—this is clearly not ideal. But rather than watching the market from the sidelines and trying to time the perfect moment to redeploy capital, we would rather remain invested and attempt to get paid to wait for entering the market.
While the long-term global rebalancing trend is intact and, indeed, accelerating, short-term cyclical and policy issues continue to hang over the financial markets. Our goal is to help protect portfolios and earn income over the short term. But we don't want that income and protection to come at the expense of our clients' longer-term objectives. We also want to position portfolios to benefit from powerful long-term trends like global rebalancing. Therefore, for investors who want to 1) protect principal while seeking current income in excess of inflation or risk-free assets, and 2) maintain a diversified portfolio that can weather changes in interest rates, geopolitical risks and macroeconomic instability, and thereby improve the likelihood of meeting long-term investment objectives, we would advise examining a yield-oriented investment strategy. We devised a simple strategy with that goal and examined its performance over the last year.
It's not necessarily a long-term approach, and it's not right for all investors. In creating our strategy, we had in mind an income-focused investor who has no tolerance for illiquidity but some tolerance for investments that may be less liquid than common equity or fixed income securities.
In addition, we know that seeking yield on an absolute basis—especially in a world where yield is scarce—can lead to unintended consequences. So our approach considers total return with an eye toward risk management.
This report is provided for informational purposes only and was not issued in connection with any proposed offering of securities. It was issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and does not contain investment recommendations. Bank of America and its affiliates do not accept any liability for any direct, indirect or consequential damages or losses arising from any use of this report or its contents. The information in this report was obtained from sources believed to be accurate, but we do not guarantee that it is accurate or complete. The opinions herein are those of U.S. Trust, Bank of America Private Wealth Management, are made as of the date of this material, and are subject to change without notice. There is no guarantee the views and opinions expressed in this communication will come to pass. Other affiliates may have opinions that are different from and/or inconsistent with the opinions expressed herein and may have banking, lending and/or other commercial relationships with Bank of America and its affiliates. All charts are based on historical data for the time period indicated and are intended for illustrative purposes only.
This publication is designed to provide general information about economics, asset classes and strategies. It is for discussion purposes only, since the availability and effectiveness of any strategy are dependent upon each individual's facts and circumstances. Always consult with your independent attorney, tax advisor and investment manager for final recommendations and before changing or implementing any financial strategy.
Other Important Information
All sector and asset allocation recommendations must be considered in the context of an individual investor's goals, time horizon and risk tolerance. Not all recommendations will be suitable for all investors
Investing involves risk. There is always the potential of losing money when you invest in securities.
Past performance is no guarantee of future results. Asset allocation, diversification and rebalancing do not assure a profit or protect against loss in declining markets.
Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.
Investing in fixed income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices generally drop and vice versa.
There may be less information available on the financial condition of issuers of municipal securities than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. Tax-exempt investing offers current tax-exempt income, but it also involves special risks. Income from investing in municipal bonds is generally exempt from Federal and state taxes for residents of the issuing state. Interest income from certain tax-exempt bonds may be subject to certain state and local taxes and, if applicable, the Alternative Minimum Tax (AMT).
Investments in high-yield bonds (sometimes referred to as "junk bonds") offer the potential for high current income and attractive total return, but involves certain risks. Changes in economic conditions or other circumstances may adversely affect a junk bond issuer's ability to make principal and interest payments.
Treasury bills are less volatile than longer term fixed-income securities and are guaranteed as to timely payment of principal and interest by the U.S. Government.
Tangible assets can fluctuate with supply and demand, such as commodities, which are liquid investments unlike most other tangible investments.
Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates, and risks related to renting properties, such as rental defaults.
Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.
International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.
Stocks of small- and mid-cap companies pose special risks, including possible illiquidity and greater price volatility than stocks of larger, more established companies.