Time for a change

Columbia Management, Investment Team | July 23, 2013

  • The end of a long bull market for bonds means investors need to redefine how they generate income.
  • In an environment of heightened risk, professional expertise can help investors avoid emotion-driven mistakes.
  • Investors should consider including non-traditional investments in a broadly diversified portfolio.

The end of the bull market for bonds means the way that many people have been investing — with a heavy concentration in traditional bond holdings — will no longer work. To meet their long-term financial goals in this changed environment, investors will need to redefine how they generate income. So, it’s time for a change, but a change to what?

While equities have had a strong run post-crisis, many investors fear that the stock market has run too far, too fast, and they are unlikely to embrace the prospect of exchanging one risky portfolio (overweight bonds) for another (overweight equities). Keep in mind that while the S&P 500 Index earned an annualized return of 8.21% over the last 20 years, the average investor in stock mutual funds earned 4.25%.* Most investors find it difficult to separate their emotions from their financial decisions. Furthermore, they often buy after periods of strong performance and sell after periods of poor performance. These are key reasons investors work with financial planning professionals — the experience and know-how to pursue financial goals with a sound, disciplined investment strategy.

Heightened uncertainty calls for broader diversification

With elevated risk in both the stock and bond markets, investors may be tempted to sit on their cash. Then again, their financial and retirement goals haven’t gone anywhere and there’s a cost to doing nothing. Instead of giving in to worry and halting progress toward their long-term goals, investors would be better served to focus on three core needs:

  • Maximize income potential
  • Grow assets
  • Reduce downside risk

Ignoring any of these needs may lead to an investment portfolio that is unsustainable over time. The key to balancing all three is developing and maintaining a broadly diversified portfolio — casting a wider net. Casting a wider net is not about abandoning your traditional bond holdings; it’s about broadening your pursuit of income to investment opportunities you may not have considered in the past. (Related reading: Casting a wider net for income.)

The “old reliable” of income investing — the core bond portfolio that many investors still own today — can no longer go it alone. This will be the era of the broadly diversified income portfolio. Today’s portfolio will require a strategic income investing approach, global insight and rigorous in-depth research. It will include asset classes that yesterday’s portfolio didn’t. Non-traditional investments such as floating rate loans and emerging market securities may play a bigger role because of characteristics that align with today’s changed economic landscape.

For an extended analysis, read the white paper: In search of income – opportunities and risks for today’s investors.

See more Market Insights from Columbia Management.

*Source: 2013 Quantitative Analysis of Investor Behavior, Dalbar, Inc.

Diversification and asset allocation does not assure a profit or guarantee against a loss.