Wednesday, April 2, 2008

Got Treasuries? (January 2008)

To: Wealth Management Clients

Subject: Got Treasuries?

Just a note on the current volatility of the world markets (which means stocks across the globe are getting hammered). We generally don’t comment on market moves, as we are not market timers. We do know, however, that many clients may be concerned about their portfolios, and looking for guidance. Here are a few points to consider:

• Your portfolio is protected by your Treasury Bond Ladder. Virtually all of our WM clients have a significant portion of their portfolio in Stripped Treasuries. Many clients doubted the wisdom of buying Treasuries last year, or 3 years ago, or 10 years ago because ‘rates are too low!’ I have a saying: ‘Safety Trumps Yield.’ Your Stripped Treasuries are now keeping your portfolio buoyant. Your yield is locked in while current yields are falling further as there is a world-wide flight to safety in the financial markets.
• No, it is not a good time to bail out of stocks. Your bond ladder assures you 15 years of cash flow guaranteed by the US Treasury. History, documented in many studies, has repeatedly shown that jumping out of stocks in a bear market results in long-term portfolio loss. Stocks are a long-term investment; ask yourself: where will the market be 5 or 10 years from now? Plus, if you get out now, you have the problem of deciding when to get back in. As dramatic as this downturn is, the upturn will be just as sudden and dramatic. You are better staying put with your treasuries than losing sleep over when to get out, and then when to get back in.
• How long will this bear market last? Historically, down markets recover in a couple of years after hitting the nadir. This one could be longer, however, as the specter of municipal bond defaults due to unfunded pension liabilities haunts the market. Many muni bonds which were AAA insured were considered safe. But now the insurance companies that ‘guaranteed’ the bonds are being downgraded as they have lost so much in the subprime debacle. Many municipalities, no longer rated AAA, are not able to raise taxes enough to cover the looming avalanche of baby-boomers pension payouts. Since these pensions are not federally insured, defaults in the muni markets could provide a double whammy to the financial markets. This could delay recovery for as long as 5 years. Which is why your bond ladders are built out for 15 years…

Rest well: we’ve got your back covered!
Bert Whitehead, MBA, JD

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