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The Investor’s Dual Dilemma

Investors are facing a portfolio dilemma on two fronts.

The State of Fixed Income Markets
  • Going forward bonds may not earn the returns they have over last 30+ years.
  • Low yields and rising inflation punish savers, forcing them to stretch for income and risk principal.
The State of Equity Markets
  • Equity markets are volatile and unpredictable (e.g. COVID-19).
  • Meanwhile mounting global debt, demographic challenges, and geopolitical risks threaten global growth.
It’s a Rock and a Hard Place Scenario

Low interest rates punish savers, forcing them to stretch for income and risk principal. But when rates rise, bond values will be eroded. On the one hand, truly “safe” bonds pay a paltry yield that doesn’t even cover inflation, on the other, higher yielding bonds act more like equities when markets are in turmoil.

 

Investors are forced to build financial plans that rely on riskier assets for growth, such as equities, taking on higher overall portfolio risk to achieve long-term goals. 

Did You Know?

A 1.00% rise in interest rates would result in a

drop of 13.20% in the value of long-term bonds.*

Since 1929, the S&P 500 data shows that, on average, bear markets:

  • Occur every 3.6 years
  • Erase over 35% of market value
  • Take 3.2 years to recover**

Navigating the Dual Dilemma

How are you prepared for these historic challenges?    

What are you doing differently?

 

Since 1997, the Swan Defined Risk Strategy has addressed this Dual Dilemma.

 

Explore how you can remain always invested, always hedged seeking growth and portfolio protection.

Review the Defined Risk Strategy

Dual Dilemma Related Articles

Is the 60/40 Portfolio Broken? Is 60/40 portfolio broken? Financial experts, and investors alike, ponder if this approach will meet expectations going forward. The culprit? Bonds.
The Dire Outlook for Bonds 2021 Over the coming decade or two, bonds are unlikely to fulfill their dual role of income and capital preservation. Bond investors will be forced to choose between income or capital preservation, and there is a good chance they could end up with neither. In the summer of 2019, Swan Global Investments published a well-received white paper, “The Bleak Future of Bonds.” The main thesis was the economic fundamentals are unfavorable for fixed income securities across the credit spectrum creating portfolio construction challenges for many advisors. Less than a year later, the global economy was devastated by the coronavirus pandemic. Unfortunately for investors, the monetary and fiscal consequences of the pandemic have made the outlook for bonds even worse. The trends and concerns raised a year ago have been exacerbated by the pandemic. What was bleak a year ago is dire today.
The Effects of Inflation While the causes of inflation are many, we believe that the effects of inflation are underappreciated or poorly understood. With inflation being largely irrelevant over the last 40 years, this isn’t a surprise. However, it might be time to revisit some of the lessons of Economics 101 as inflation returns.
Consequences of Inflation on Stocks Learn how inflation may affect stock markets and how investors can combat the consequences of inflation.
Thinking Outside the Mailbox with Systematic Withdrawals In today’s low-yield world, bonds provide little or no real return, creating significant pressure on the rest of the portfolio to deliver all of the growth necessary to sustain withdrawals over time. Instead, investors may need to consider other investment strategies to mitigate risk, such as hedged equity strategies that seek to reduce the risk of large portfolio losses through market cycles, so their “income” stream may last throughout retirement.
Pitfalls of Passive Index Investing Understand the pitfalls of passive index investing, addressing risks in index investing, and the birth of passive investing 'Nifty Fifty - The S&P 500.
Implications of the Fed's Policy Shift for Investors Learn how the Federal Reserve signaling a shift in monetary policy is causing a shift in the markets that have run hot on many years of stimulus and low rates.

* Source: Morningstar Direct. Effective duration as of 1.31.22

** Source: Bank of America Merrill Lynch, Global Research, Bloomberg, Swan Global Investments: Returns based on S&P 500 from 1929 through December 31, 2021; Zephyr StyleADVISOR