“Where can I invest that would provide a 4% a year return?” an investor asked us. “I looked at bonds, but right now bonds are paying so little.”
Investors used to be able to rely on bonds to generate a gain of about 4% a year without taking too much risk.
Historically, intermediate-term bonds have made total returns in the 4% to 6% range. But going forward, some analysts predict lower returns in the 1.7% to 3.4% range.
Additionally, interest rates are so low that some investors worry that rates have nowhere to go but up, particularly if inflation continues to rise.
What can investors, especially retirees who often don’t want to take too much risk, do in an uncertain bond market environment like this?
The investor who contacted us had some of his portfolio in cash, and he wasn’t sure what to do with it. He didn’t want to add to bonds, given their low yields, and he was hesitant to put more money in stocks because stocks can be volatile.
Investment strategies for a low interest rate environment
Here’s how FundX investment advisors have handled this for some of our wealth management clients: we’ve focused our unconventional fixed income strategy that’s designed to capitalize on opportunities in the bond market and our alternative fund approach that tends to be less correlated to the bond market. You’ll find an overview of our investment strategies here.
1. Target opportunities in this bond market
Our Flexible Income strategy is an active approach that’s designed to adapt to changing bond markets, including changing interest rates. It targets bond funds with strong recent returns, which have a better chance at outpacing inflation. Currently, this includes high-yield and strategic bond funds.
Unlike most bond strategies, our approach also can include a small allocation to balanced and total return funds. These funds aren’t fully invested in bonds, so they typically have less interest rate risk, and they’ve done well in the first half of 2021 while the bond market’s been in negative territory.
The Flexible Income approach is available to FundX wealth management clients, and this strategy is also packaged as a mutual fund that’s available to everyone. Learn more about the funds we manage here.
2. Alternative approach to low volatility investing
If bond returns are lower in the coming years, then investors may want even more diversification to generate a 4% gain, and that’s where alternative investments could play an important role.
Alternatives is a broad and growing category of funds that invest outside the traditional stock and bond buckets, as we explained in this Q&A on alternative funds. These funds may invest in alternative assets, including precious metals, real estate, or currencies, or implement hedge-fund-style strategies such as long/short or merger/arbitrage, and often combine approaches.
Within this universe, some funds are riskier than others. In our alternative approach, we focus on funds that as a group tend to have about the same risk level as bonds, but these funds take a different approach to managing volatility than bonds.
Because these funds are less correlated to the bond market, they may do well during challenging bond markets, such as inflationary periods or rising interest rate environments.
These two strategies—an active approach to fixed income and an alternative approach that’s less correlated to the bond market—can be used independently, or, in some client accounts, we use both strategies together to help lower volatility. The FundX alternative approach is only available to wealth management clients.
Financial planning for 4%
Is 4% the right number to target given your financial situation? Which portion of your portfolio should you invest for a 4% return? And which strategies and funds might be best suited for your goals and needs? Our financial planning process can help answer these key questions. A financial plan helps target the return you’ll need to meet all your goals, and it can help us determine an optimal allocation for the return you want to achieve.
Learn more about how FundX strategies and financial planning might help you move forward. Click here to set up an initial conversation with an advisor and let's see if we're a good fit for you, and you're a good fit for us.