BUZ LIVINGSTON: But if interest rates stay the same

Published: Thursday, April 18, 2013 at 02:49 PM.

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 Bernstein’s statement last week that investors should “grin and bear it” 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 investor’s portfolio. Morgan allegedly replied, “Sell to the sleeping point."

Investors have historically used fixed income from CDs, bonds, or bond mutual funds to provide income and reduce volatility.  With today’s 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 that’s a rollercoaster ride many people don’t expect from fixed income. 

In one of the boldest statements I’ve seen, Ferri sees “the Fed keeping interest rates low for the next 20 years." Wow and while Ferri didn’t 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 Fed’s 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.

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