Index Universe (indexuniverse.com) recently interviewed my friend and Marine aviator Rick Ferri. Since Ferri was in friendly territory, the discussion was far more encompassing than typical conversations regarding index investing. For me, it was a doubleheader. Last week, Index Universe featured another indexing hero, Bill Bernstein. Baseball teams once featured doubleheaders (two games for one ticket) to generate additional ticket sales.  



Back to finances and Index Universe, Ferri challenged Bernsteinís statement last week that investors should ďgrin and bear itĒ with respect to low yields with fixed income. Ferri instead proposed owning stocks, via low fee ETFs and index funds, as an alternative and highlighted the risk of holding cash or an equivalent like T-bills. Many people should reconsider the conventional adage about shifting to fixed income as they age but only if they can tolerate the additional volatility.



According to legend, a worried investor asked famed financier Pierpoint Morgan how to stop insomnia caused by the investorís portfolio. Morgan allegedly replied, ďSell to the sleeping point."



Investors have historically used fixed income from CDs, bonds, or bond mutual funds to provide income and reduce volatility.  With todayís market, income is either gone with the wind or fading fast. If rates on the 10 Year Treasury Note rise from 2 percent to 4 percent, the Note drops roughly 20 percent and thatís a rollercoaster ride many people donít expect from fixed income. 



In one of the boldest statements Iíve seen, Ferri sees ďthe Fed keeping interest rates low for the next 20 years." Wow and while Ferri didnít delve into the microeconomics of Walton County real estate, an extended period of low rates bodes well for local real estate.



A BMO fixed income conference call also reinforced the forces working against higher rates -- the unemployment rate and the Fedís position to keep rates low until employment rises along with scant demand from both demographics and pending fiscal austerity. With low rates, real estate values, especially up-scale, should remain firm. 



Even in a low interest rate environment, you need income producing components. Rental real estate, far from a perfect fixed income proxy, also produces income and in my personal opinion is a great way to diversify.  Remember the Four Tees of Rentals: Time, Trash, Tenants and Toilets.



Real estate investment trusts (REITS) provide investors regular income but are more volatile than stocks. From 2006-2009, REITS ranged from up 36 percent, down 18 percent, down 39 percent and up 29 percent.  Investors should heed Bill Bernsteinís words and get used to low rates for short-term goals. While dividends and capital gains via stocks may work, next Septemberís college tuition should be principal protected and liquid.



Conventional wisdom has interest rates rising eventually but eventually we will all be dead.



 



Kudos to the TDC



I saw the pictures of Miramar Beach during spring break and commend the TDC for cleaning up a beach open to the public.   The beach in question may be private but courts have long held the public has an easement on Florida beaches. Seascape has public accesses, amenities and parking spaces constructed by the county with maintenance transferred to the TDC. Walton County built it, they came, no invitation necessary, ala "Field of Dreams."



We adroitly used touristsí money to clean up their mess -- a wise and prudent expenditure Ö how infinite in faculty.   



BuzLivingston, CFP offers hourly financial planning and fee-only investment management to clients along Floridaís Emerald Coast.  Contact him at 850-267-1068, Buz@LivingstonFinancial.net or www.LivingstonFinancial.net.