Jonathan Clements is an author and former columnist at the Wall Street Journal who now writes the popular U.S. investing site Humble Dollar. In the recent post “Farewell Yield,” Mr. Clements tackled the important implications of low bond yields for portfolios.
Mr. Clements first recommendation is to abandon government bonds, which might be an unsettling bit of advice for conservative investors.
“It’s time to say goodbye to the notion of a safe yield,” he writes. “Stocks are now the only option for long-term investors hoping to clock significant gains in the financial markets.”
The author goes on to note that high quality corporate bonds have after-tax yields barely exceeding inflation expectations. He points to [admittedly dated] research by late economist Peter Bernstein. Mr. Bernstein’s calculations showed that portfolios weighted 75 per cent to equities and 25 per cent to cash had historically similar risk reward profiles to the benchmark 60 per cent stock, 40 per cent bond portfolios.
Mr. Clements second suggestion to buy an annuity will be contentious for fee conscious investors.
He argues, however, that the yield on annuities is not solely based only on bond yields – longevity, which hasn’t changed with bond markets, also figures prominently. As a result, annual payments on annuities now exceed 10-year bonds by a considerable margin.
The column is written from a U.S. perspective, but a quick check on domestic annuities shows that 10-year average annual payments of over 4 per cent are available. The 10-year government of Canada bond currently yields 0.58 per cent. The suitability of annuities is, of course, far more complicated than this simple math and requires more research. But, on the surface, the comparative returns are worth the time to investigate.
I would add that income-bearing equity sectors like utilities and REITs will generate premium price-to-earnings valuations relative to the overall Canadian equities market for as long as bond yields stay at these depressed levels.
All of these suggestions fall apart if bond yields begin to march higher, as strategists at Morgan Stanley believe. The balance of probabilities, however, continues to suggest extremely low government bond yields for the foreseeable future and investors must begin to think of strategies to maintain return expectations for retirement.
-- Scott Barlow, Globe and Mail market strategist
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What’s up in the days ahead
Retail investors are looking for ways to juice returns amid the recent market rebound. Tim Shufelt will tell us about one method they are using. Plus, Rob Carrick will argue why it’s time to stop with all the vitriol toward free stock-trading apps that have become wildly popular with young adults.
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Compiled by Globe Investor Staff