April 2010 Newsletter
Inflation Protection and Other News
Dear Client,
We think that higher interest rates are on the horizon, and that the day of short term rates
close to zero are probably over. Our goal is to help prepare you for this different environment
with your portfolio and investment choices.
This past quarter, the Federal Reserve increased the discount rate from 0.50% to 0.75%. (The
discount rate is the interest rate charged to commercial banks and other depository institutions
on loans they receive from their regional Federal Reserve Bank's lending facility.) Raising the
discount rate may also be an indicator of healing in the banking system. The Fed did stress
that the move doesn’t necessarily mean an imminent rise in the federal-funds rate (the interest
rate banks charge each other for overnight loans), which is a more important lever on
managing interest rates, but indicated that it is prepared to act when necessary.
Some of our recommendations for a higher interest rate environment are:
Review your bond holdings and consider short term bond funds in lieu of long term
bond funds.
Many mutual fund companies list the duration of the bonds in their portfolios. Bonds with a
duration of five years or less are considered short term, where a ten or more year duration
would be considered long term. Going forward, we will likely be selecting shorter term bond
funds and keeping our eye on when rates might tick up. We also have bond allocation funds
that offer diversification and active management by way of moving from long term to short term
as needed. (Mutual fund bond managers also have some leeway to adjust for interest rate
changes.)
Diversify and choose sectors that can battle inflation.
The possibility of higher inflation is something to consider. Whether or not we will see prices
skyrocket over the next few years or so, we do not know. The only gage we have is history, so
the ideas that we present on dealing with inflation within your portfolio are based on how
various sectors responded in the past.
The energy sector seems to be a sector that can weather inflation, as well as defensive stocks
and small cap stocks. Consumer stocks, particularly those dealing with health care, including
pharmaceuticals, could be possible choices for diversification and inflation protection. There
are also bond funds issued by the Treasury that adjust interest rates for inflation. Did you
know timber prices historically have outpaced inflation? Timber REITs (real estate investment
trusts) could also be a consideration.
We do prefer that our clients consider allocation funds to help combat the concern we all have
for higher interest rates, inflation and market volatility. These allocation models are designed
for diversification and various risk levels.
Schedule an appointment with us to review all of your holdings (by phone or in person).
Bottom line, we recommend that you periodically call our office and schedule an appointment
that will allow us to review all of your holdings and how you are positioned for diversification
which would include ensuring that you are allocated appropriately for all market situations
including, but not limited to, inflation and higher interest rates.
We trust that you are weathering this tax season and you have “cheerfully” helped our budget
deficit by paying your taxes.
But on a serious note, in closing, we appreciate your business and desire to work with you and
for you in reaching your financial goals.
Sincerely,
Greg Hicks, Wanda Cooper and Emily Guthrie