Pattie Lovett-Reid: Saving never goes out of style
Investors are desperate for yield and seem prepared to take on more risk than their portfolios may warrant.
It is hard to get excited about a sub-2-per-cent yield on government bonds to satisfy your fixed income exposure, especially when that exposure is needed to balance out the asset allocation in your portfolio and keep you aligned to your true risk-tolerance.
Diversification is what makes asset-allocation work. How much money you have in cash, fixed income and the equity markets is often driven by your time horizon and risk-tolerance.
Yet, investors seem to be throwing caution to the wind, pushing basic investment fundamentals to the sideline in search of a better return.
I get it. Rates have been so low for so long that investors have flocked to the equity markets. This has, in turn, pushed the markets into record territory, ignoring the fact that some sectors are overvalued by even the most bullish standard.
Central banks have slashed rates and telegraphed they will be lower for much longer. They have also pledged to buy up government debt and hinted that additional stimulus may potentially be on the horizon. With this sort of financial support, segments of the market are gaining more attention including junk bonds and municipal debt. In other words higher-yielding, lower-quality debt.
Understandably, it is hard to get excited about buying into quality corporate and government bonds with yields hovering around an almost-decade-low and that is a key factor causing investors to pile into riskier assets. The popular targets nowadays seem to be lower-quality companies, investment alternatives like bitcoin, and placing bets on who will be the big winner when a vaccine takes hold and herd immunity allows for the economy to reopen with a vengeance.
There are a lot of wildcards still at play and while the unknown continues to play out investors want to be paid to wait. Thus, they are willing to take on risk to do it.
A prime example can be seen in one of Friday’s big stories; oversubscribed interest for $250-million in Cineplex Inc.’s debt financing, with bonds yielding between 7.5 and 7.75 per cent… and these are unrated bonds. Are we ready to assume crowds will be flocking back to the cinema anytime soon?
There continues to be uncertainty; interest rates are low, stock dividends pretty sparse and bond yields have fallen off a cliff. However, try to remember that the recovery trade can be dangerous if the ultimate goal is to continue to search for yield over quality.
I may leave a little yield on the table, but good quality investing, held over a long period helps me to sleep at night.