Miracle of Compounding Returns

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“The compounding of returns is an incredible miracle of business, finance and human existence. Everything you learn is additive, every day. And if you keep at it and don’t quit, it’s an incredible miracle.” Bruce Flatt

Bruce Flatt, the chief executive officer of Brookfield Asset Management Inc. said in an episode of Bloomberg Wealth with David Rubenstein, “Everyone always thinks about geopolitical events, and one needs to be careful in business with everything they do. But, all geopolitical events pass. Wars, explosions, recessions — all those things, they come and go. And they’re really important at the time, but if you have good businesses in great places and keep compounding returns, you’ll earn excellent long-term returns.”

Brookfield is a place that tries to make as many small mistakes as you possibly can, according to Flatt, which means that they’re “testing the windows every day, but just don’t make any really large mistakes. People are encouraged to make small mistakes. And that’s a good thing. It means that we’re testing the limits of where we should be going.”

Brookfield focuses on infrastructure investments such as toll roads, utilities and real estate and they use their own balance sheet to invest alongside clients.

The company is also adding more wealth products for individual investors. Last year, it started its own private real estate investment trust after taking over a portfolio of properties overseen by a subsidiary of Oaktree Capital Management.

The best investment advice, according to Flatt, is to invest early and then do not sell your assets in order to take advantage of “the miracle of compound interest”. “The compounding of returns is an incredible miracle of business, finance and human existence”‘ states Flatt. “Everything you learn is additive, every day. And if you keep at it and don’t quit, it’s an incredible miracle.”

Thus, they’ve made lots of little mistakes, but you can’t compound at 17% for 30 years, or 20% annualized for 20 years, and make any big mistakes. It’s impossible.

The argument for putting money in an active investment vs. an index fund are straight forward. If an individual has very little knowledge of or time to dedicate to investing, owning a passive index fund in equities is probably the right thing to do. They should “Put their money in an index fund and don’t sell. Just keep it in and let it compound over a long period of time.”

There are two macro concerns every investor should heed:

  • 1970s-like inflation, or
  • Interest rates at 8% in the United States,.

Those two things are macro things can’t be controlled. But if those two things occur, then it changes the paradigm of what you should be doing with your capital.  

“Inflation actually is a positive for most of the things that we do,” Mr Flatt stated. “If this office building costs X to build today and inflation comes, it’s going to cost X plus something, which means that the rent to justify a new building is more.”

The real macro issue of great concern is interest rates. But “if interest rates spiral out of control and go up a lot, then that changes the paradigm”. It is an outcome that he fears but does not expect to happen.

References:

  1. https://www.bloomberg.com/news/articles/2022-04-05/brookfield-billionaire-flatt-reveals-secret-behind-3-700-return
  2. https://www.afr.com/wealth/investing/brookfield-billionaire-reveals-the-secret-behind-its-3700pc-return-20220406-p5ab5x

“The doors on wisdom are never shut.” Benjamin Franklin

Bond vs Stock Dividend Yields

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“Bonds have nowhere to go but down since interest rates have nowhere to go but up.” Liz Young

Investment income is vital in shaping the returns on equity and debt securities.

Comparing income and yields from bonds and dividend paying stocks are a useful metric because they are a function of both the income to be received on a security and the current price of that security, according to Liz Young, Head of Investment Strategy for SoFi.

Dividend yield on the S&P 500 vs. the yield on the 10-year Treasury are a useful because they are a function of both the income to be received on a security and the current price of that security, said Young.

The simple way to read this chart would be to say the yield on a 10-year Treasury is considerably more attractive than the dividend yield on stocks. But not all yields are created equal.

There not equivalent because investors traditionally buy stocks for their upside potential, not for their dividend income.

Whereas bonds are traditionally thought of as an income generating debt asset. Which means this metric is useful, but not the end-all-be-all decision factor. Dividend stocks are traditionally thought of as an income generating equity asset.

“Treasury bond yields could hit a ceiling (meaning prices hit a floor) and start moving in the opposite direction”, states Young. “This could be caused by:

  • A breakdown in the economy (thus increasing fear of recession),
  • A moderation in inflation, and/or
  • The Federal Reserve turning less hawkish.”

The best time to buy US Treasuries was in the early 1980s, when interest rates were peaking, and high fixed rates were destined to look good over the long term.

“Bonds have nowhere to go but down since interest rates have nowhere to go but up”, says Young. Bonds would not function effectively in the current rising interest rate and historic inflationary environment to protect investors’ downside risk. Bonds would not offer protection to downside shocks in stocks.

Historically speaking, it’s best for investors to avoid bonds when central banks print money. More cash can lead to inflation, which can lead to central banks raising interest rates higher—and put a damper on any fixed-rate assets.

“Never depend on a single income; make an investment to create a second source.” Warren Buffett

References:

  1. https://www.sofi.com/blog/liz-looks-stocks-vs-bonds/
  2. https://www.forbes.com/sites/brettowens/2020/08/06/the-7-best-and-worst-bonds-to-buy-right-now/

Jackie Robinson #42

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Jackie Robinson, the six-time Major League Baseball (MLB) All-Star and Hall of Famer, wasn’t just a pioneering athlete. His effort—and sacrifice—launched a cascade of human and civil rights advances.

Seventy-five years ago when Jackie Roosevelt Robinson started at first base for the Brooklyn Dodgers on April 15, 1947, he broke major league baseball’s six-decade-long color barrier, which not only made him an icon to those fighting for racial equality, but he was also a target for those who sought to fight against it. Jackie’s poise and strength—both on and off the field—are why he is honored today. He signaled to America that African Americans would no longer remain quiet and accept second-class citizenship status. 

“His courage and bravery played a major role in the history of integration, both on the field and throughout American society,” wrote Harvard historian Henry Louis Gates, “and no history of the civil rights movement would be complete without noting Robinson’s major role.” 

“Jackie Robinson gave all of us—not only black athletes, but every black person in this country—a sense of our own strength,” wrote MLB Hall of Famer Hank Aaron in his introduction to Robinson’s autobiography ‘I Never Had It Made’. 

Robinson’s strength was not only as a gifted athlete and fierce competitor who earned Rookie of the Year, MVP and six-time All-Star status. His strength manifested itself as dogged perseverance in the face of a tidal wave of racism—from daily taunts and threats to broad institutional inequities.

Robinson’s athletic brilliance and contributions to history earned him the Presidential Medal of Freedom and resulted in Major League Baseball retiring his number “42” in 1997—a first for any athlete, in any sport. 


Shortly before Robinson’s induction into MLB Hall of Fame ceremony, Dr. Martin Luther King, Jr. paid tribute to Robinson’s pioneering achievements this way: “Back in the days when integration wasn’t fashionable, he underwent the trauma and the humiliation and the loneliness that comes with being a pilgrim walking the lonesome byways toward the high road of Freedom. He was a sit-inner before sit-ins, a freedom rider before freedom rides.” 

U.S. Army

After receiving his military draft notice in March 1943, Army recruit Robinson reported to Fort Riley, Kansas for basic training. After racism initially barred him and other Black recruits from Officer Candidate School—despite their clear eligibility—they were eventually accepted.

But his time in the segregated U.S. Army would prove deeply frustrating. It ended not long after an incident near Fort Hood, Texas. In 1944, he was riding in a U.S. Army bus with the wife of a fellow Black officer. The driver, believing the light-skinned woman to be white, ordered Robinson to the back of the bus. Robinson, noting the fact that U.S. Army buses were not segregated, refused. The driver backed down, but called Military Police after the ride. Robinson was taken into custody and eventually court-martialed for disrespecting and disobeying a superior officer, disturbing the peace and drunkenness (although he neither drank nor smoked). He fought back and, despite false witness statements stacking the deck against him, he was eventually acquitted of all charges and received an honorable discharge in 1944, having reached the rank of second lieutenant.

Jackie Robinson Day

Beginning in 2007, players across the MLB started wearing Robinson’s No. 42 every April 15 in observance of Jackie Robinson Day, a tradition that continues.

References:

  1. https://www.history.com/news/jackie-robinson-life-baseball-pictures
  2. https://www.history.com/news/jackie-robinson-color-barrier-baseball

Purpose

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“The only way to do great work is to love what you do. If you haven’t found it yet, keep looking. Don’t settle. As with all matters of the heart, you’ll know when you find it.” Steve Jobs

Purpose is an abiding intention to achieve a long-term goal that is both personally meaningful and makes a positive mark on the world, according to The Greater Good Science Center at the University of California, Berkeley. The goals that foster a sense of purpose are ones that can potentially change and improve the lives of other people. “If you can tune into your purpose and really align with it, setting goals so that your vision is an expression of that purpose, then life flows much more easily”, says author Jack Canfield

Purpose is not a destination, but a life’s journey, a mindset and a practice. It’s accessible at any age and at any income level, if we’re “willing to explore what matters to us and what kind of person we want to be—and act to become that person”. Filmmaker and author Drew Scott Pearlman writes: “Your purpose must be particular to you. This is the road less traveled. Your purpose cannot be someone else’s path, not your family’s path nor your friends’ path.”

Individuals with a sense of purpose report higher levels of happiness and life satisfaction—which seems associated with better health, wealth and emotional well-being outcomes. For many people, it was good and beneficial to have a purpose or a goal, no matter what it was.

Additionally, the physical health benefits of a sense of purpose are well-documented. For example, a Harvard’s School of Public Health study found that people who report higher levels of purpose at one point in time have objectively better physical agility four years later than those who report less purpose.

Moreover, researchers suggest that people take better care of themselves when they feel like they have something to live for. Having a purpose also seems to be associated with lower stress levels, which contributes to better health and emotional well-being. And, according to Helen Keller, “True happiness… is not attained through self-gratification, but through fidelity to a worthy purpose.”

Additionally, people with a more “prosocial” purpose—one aimed at helping others—experienced greater personal growth, integrity, and health later in adulthood. This result was echoed by a 2019 study by Anne Colby and colleagues at Stanford University. They surveyed almost 1,200 Americans in their midlife about their well-being and what goals were important to them. The researchers found significantly better physical health and higher emotional well-being among people who were involved in pursuing beyond-the-self goals, compared to those who were pursuing other types of goals. In other words, engaging in prosocial goals had more positive impact on physical health and emotional well-being than engaging in non-prosocial goals.

A sense of purpose appears to suggest that humans “can cooperate and accomplish big things together”. Research suggests that team leaders can effectively boost the productivity, work experience and well-being of their team members by helping them connect to a task-related higher purpose. The 2013 Core Beliefs and Culture Survey revealed that 91 percent of respondents who believe that their company has a strong sense of purpose also say it has a history of strong financial performance.

“Everything in your life informs you what your purpose is. How do you know it’s your purpose? It feels like it’s the right space for you. It feels like ‘This is what I should be doing; this is where I feel most myself.” Oprah Winfrey

Purpose also helps both individuals and the species to survive and thrive. Purpose often grows from our connection to others, which is why a crisis of purpose is often a symptom of isolation. Once you find your path, you’ll almost certainly find others traveling along with you, hoping to reach the same destination—a community.

youtu.be/_7wnkUP-Q4E

According to research by Kendall Cotton Bronk, a professor of psychology in the Division of Behavioral & Social Sciences at Claremont Graduate University, finding one’s purpose requires four key components:

  1. Dedicated commitment,
  2. Personal meaningfulness,
  3. Goal directedness, and
  4. A vision larger than one’s self.

Often, finding our purpose involves a combination of finding meaning in the experiences we’ve had, while assessing our values, skills, and hopes for a better world. It means taking time for personal reflection while imagining our ideal future. “Everything in your life informs you what your purpose is. How do you know it’s your purpose? It feels like it’s the right space for you. It feels like ‘This is what I should be doing; this is where I feel most myself’,” says Oprah Winfrey

A sense of purpose as we navigate milestones and transitions means that we can look forward to more satisfying, meaningful and abundant lives.

“He who has a why to live can bear almost any how.” Nietzsche

References:

  1. https://greatergood.berkeley.edu/topic/purpose/definition
  2. https://greatergood.berkeley.edu/topic/purpose/definition#why-find-purpose
  3. https://greatergood.berkeley.edu/topic/purpose/definition#how-to-cultivate-purpose
  4. https://www.thegrowthreactor.com/quotes-about-purpose-in-life/

National Volunteer Week

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“There’s a saying, “Life and love aren’t about what you gain; they’re about what you give.” What a great way to sum up the purpose of volunteer work.” Canada Protection Plan

America is a country built on service. From our earliest days, Americans have stepped forward to help neighbors and tackle our toughest challenges.
This second week in April is National Volunteer Week. All Americans are encourage to pick their favorite foundation, museum or charity and spend a few hours or days giving back to the communities that have given us so much.

National Volunteer Week is an annual celebration observed in many countries, to promote and show appreciation for volunteerism and volunteering. In the United States, it is organized by the Points of Light foundation, and in Canada by Volunteering Canada. It is held in those two countries in mid to late April.

Last year’s Presidential National Volunteer Week Proclamation read:

“We are living in a moment that calls for hope and light and love. Hope for our futures, light to see our way forward, and love for one another. Volunteers provide all three.”

“Service—the act of looking out for one another—is part of who we are as a Nation. Our commitment to service reflects our understanding that we can best meet our challenges when we join together.”

“This week, we recognize the enduring contributions of our Nation’s volunteers and encourage more Americans to join their ranks.”

During National Volunteer Week, it’s important to show up for your communities, make service a goal, and make a difference.

“Give the gift of time and commit to serve.”

References:

  1. https://www.census.gov/newsroom/stories/volunteer-week.html
  2. https://www.americorps.gov/blogs/2022-04-12/celebrate-nations-volunteers-all-week

Inflation Overtakes Labor Quality as Top Business Problem For Small Businesses

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“Inflation has now replaced “labor quality” as the number one problem.” National Federation of Independent Business

The National Federation of Independent Business (NFIB) Small Business Optimism Index decreased in March by 2.4 points to 93.2, the third consecutive month below the 48-year average of 98.

Thirty-one percent (31%) of small business owners reported that “inflation was the single most important problem in their business, up five points from February and the highest reading since the first quarter of 1981”. Inflation has now replaced “labor quality” as the number one problem.

“Inflation has impacted small businesses throughout the country and is now their most important business problem,” said NFIB Chief Economist Bill Dunkelberg. “With inflation, an ongoing staffing shortage, and supply chain disruptions, small business owners remain pessimistic about their future business conditions.”

Key NFIB findings include:

  • Owners expecting better business conditions over the next six months decreased 14 points to a net negative 49%, the lowest level recorded in the 48-year-old survey.
  • Forty-seven percent of owners reported job openings that could not be filled, a decrease of one point from February.
  • The net percent of owners raising average selling prices increased four points to a net 72% (seasonally adjusted), the highest reading in the survey’s history.
  • The net percent of owners raising average selling prices increased four points to a net 72% (seasonally adjusted), the highest reading recorded in the series.

The difficulty in filling open positions is particularly acute in the transportation, construction, and manufacturing sectors where many positions require skilled workers. Openings are lowest in the finance and agriculture sectors.

Eight percent of owners cited labor costs as their top business problem and 22% said that labor quality was their top business problem, now in second place following “inflation.”

Forty percent of owners report that supply chain disruptions have had a significant impact on their business, up three points. Another 28% report a moderate impact and 23% report a mild impact. Only 8% report no impact from recent supply chain disruptions.

References:

  1. https://www.nfib.com/content/press-release/economy/inflation-overtakes-labor-quality-as-top-business-problem-for-small-businesses/ (Inflation Overtakes Labor Quality as Top Business Problem For Small Businesses)
  2. https://www.nfib.com/small-business-survival/

The National Federation of Independent Business (NFIB) is the voice of small business and advocates on behalf of America’s small and independent business owners. NFIB is nonprofit, nonpartisan, and member-driven.

Inflation Will Persist

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“Inflation is like chewing gum. It’s sticky and flexible, and you definitely don’t want to step in it.” Capital Group

For the past 30 years, investors haven’t had to worry much about dealing with inflation, says Capital Group fixed income portfolio manager Ritchie Tuazon. That changed last summer when COVID-related distortions and excessive government stimulus caused prices for energy and most consumer goods to skyrocket.

Today, the biggest questions for long term investors are how high will inflation go and how long will it last?

Adding to the uncertainty is that there are two types of inflation, according to Tuazon:

  • Sticky inflation tends to have longer staying power. Sticky categories include rent, insurance and medical expenses.
  • Flexible inflation — affecting items such as food, energy and cars — has risen much faster in recent months but many believe it won’t last.

From Capital Group’s perspective, they expect high inflation might persist longer than expected and should move closer to its 2% historic goal by sometime in 2023.

Higher inflation levels should remain elevated through late 2022, fueled by labor shortages and broken supply chains. “Consumer prices will eventually return to normal, but that process may take longer than Fed officials are expecting,” says Tuazon.

The Fed is left to react to inflation, but not overreact. Start, but not go too fast. Tighten, but not in the “wrong” ways.

Regarding inflation impact, “the first question is whether inflation will cool off enough on its own to not threaten corporate earnings growth or hurt consumer spending”, states Liz Young, Head of SoFi Investment Strategy. “The second question is less about whether the Fed can control inflation expectations with policy moves and more about whether the market is going to think they’re making a mistake and create a self-fulfilling prophecy.”

References:

  1. https://www.capitalgroup.com/advisor/pdf/shareholder/MFCPBR-086-652781.pdf

Don’t Fight the Fed

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“We continue to believe that the S&P will see a correction of at least 20% over the next one to two years as the Fed is more aggressive than expected to deal with inflation running higher than expected and easy money begins to decrease.” Dan Niles

“The markets are in a volatile and dangerous place as of now,” writes Dan Niles, founder and portfolio manager for the Satori Fund.

In his article entitled “Market Thoughts Following Q1”, Niles contends that investors heed the warning: “Don’t Fight the Fed”.

He states that “Investors are forgetting that it [Don’t Fight the Fed] works on the way down as well as the way up. The Federal Reserve (The Fed) expanded their balance sheet by $4.8 trillion since the start of the pandemic while the US government added ~$5.5 trillion in stimulus. Combined stimulus of roughly half of US GDP of $20.5 trillion is the major driver of why the prices of stocks (along with homes, cars, boats, crypto, art, NFTs, etc) all went up over the past two years during a global pandemic. Now, the Fed dot plot shows 10 rate hikes in less than two years and they will be cutting trillions off the balance sheet probably starting on May 4th along with a 50 bps rate hike.”

“The #1 concern for investors in 2022 should continue to be that the Fed is so far behind the curve on dealing with inflation that they will have to be much more aggressive than in prior tightening cycles despite high inflation & geopolitical risk.” Dan Niles

“We [Satori Fund] continue to believe that the S&P will see a correction of at least 20% over the next one to two years as the Fed is more aggressive than expected to deal with inflation running higher than expected and easy money begins to decrease. Since World War II,

  1. Every time Inflation (CPI) is over 5% a recession has occurred
  2. Every time oil prices have doubled relative to the prior 2-year average ($54 in this case) a recession has occurred
  3. 10 of the 13 prior recessions have been preceded by a tightening cycle by the Fed
  4. 10 of the last 13 recessions have been preceded by the 10-year yield going below the 2-year yield”

For retail investors, Niles recommends “cash until inflation, Fed tightening and economic slowing run their course over the next one to two years. He writes that “most of the time, cash is a terrible investment especially in a high inflationary environment, but it is better to lose 6-7% to inflation this year than 20%+ in a stock market drop. With the Fed being this far behind the curve on inflation, we will find out how much froth is in valuations as the Fed starts tightening as growth continues to slow.”

Satori Fund likes companies that

  1. Benefit from economic reopening (not pandemic beneficiaries);
  2. Are profitable with good cash flow;
  3. Have growth but at a reasonable price;
  4. Benefit from higher-than-average inflation;
  5. Benefit from multi-year secular tailwinds. 

They foresee investing tailwinds in:

  • Datacenter, office enterprise, and 5G infrastructure.
  • Reopening plays such as airlines, cruise lines, travel, rideshare, and dating services as people adjust to covid becoming endemic.
  • Banks which should benefit from higher interest rates.
  • Alternative energy as geopolitics and fallout from the Russia-Ukraine War drives investment in the space.

References:

  1. https://www.danniles.com/articles

Bonds Getting Clobbered

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“Bondholders are going to be in for some nasty surprises…because the losses are piling up.” CNBC’s Kelly Evans

A bond is a debt security, similar to an IOU. Borrowers issue bonds to raise money from investors willing to lend them money for a certain amount of time.

When you buy a bond, you are lending to the issuer, which may be a government, municipality, or corporation. In return, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the principal, also known as face value or par value of the bond, when it “matures,” or comes due after a set period of time.

Just as individuals get a mortgage to buy a house, or a car loan to buy a vehicle, or use credit cards, corporations use debt to build factories, buy inventory, and finance acquisitions. Governments use debt to build infrastructure and to pay obligations when tax revenues fluctuate. Loans help to keep the economy running efficiently.

Whenever the size of the loan is too large for a bank to handle, companies and governments go to the bond market to finance their debt. The purpose of the bond market is to enable large amounts of money to be borrowed.

Bonds can provide a means of preserving capital and earning a predictable return for investors. Bond investments provide steady streams of income from interest payments prior to maturity.

The bond market (also known as the debt market or credit market) is a financial market where players can buy and sell bonds in the secondary market or issue fresh debt in the primary market. Like the stock market, the bond secondary market is made up of investors trading with other investors. The original company that received the money and is responsible for paying back the money, is not involved in the day-to-day trading. The market value of bonds can fluctuate daily due to changes in inflation, interest rates, and fickleness of investors.

The United States accounts for around 39% of total bond market value. According to the Securities Industry and Financial Markets Association (SIFMA), the bond market (total debt outstanding) was worth $119 trillion globally in 2021, and $46 trillion in the United States (SIFMA). The worldwide bond market is almost three times larger than the global stock market.

“I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a 400 basball hitter. But now I would like to come back as the bond market. You can intimidate everybody.” James Carville

The bond market is more important to the health of the U.S. and global economies than the stock market. And, you prefer for the bond market is not in the news, to be boring and functioning smoothly. Disruption in the bond market is what can get the economy in trouble.

As with any investment, bonds have risks which include:

  • Interest rate risk. Interest rate changes can affect a bond’s value. If bonds are sold before maturity, the bond may be worth more or less than the face value. Rising interest rates will make newly issued bonds more appealing to investors because the newer bonds will have a higher rate of interest than older ones. To sell an older bond with a lower interest rate, you might have to sell it at a discount.
  • Inflation risk. Inflation is a general upward movement in prices. Inflation reduces purchasing power, which is a risk for investors receiving a fixed rate of interest.

In aggregate, bond values are down significantly over the past three months–one of the worst quarters the securities have experienced since the 1980s, explains CNBC’s Kelly Evans. According to Natalliance, “government bonds are on pace for their worst year since 1949.”

Famed former Legg-Mason investor Bill Miller warned several years ago that “when people realize they can actually lose money in bonds, they panic”. Going into the inflationary 1970s, he said, “investors had done so well in bonds for so long they viewed them as essentially riskless, until it was too late.”
Investors have been warned for years about a bond crash that never panned out until recently. The chorus of financial pundits have said that the Federal Reserve’s massive quantitative easing and the federal government’s fiscal response to the financial crisis would ultimately cause inflation and crater bonds, it turns out they were right.

As a result, investors are piling out of bonds, which have seen outflows for ten straight weeks. Municipal bonds have seen historic outflows and are about to post their worst quarter since 1994, down more than 5%, according to Bloomberg. Investors have also been fleeing high-yield debt, especially as the Fed has turned increasingly hawkish this month.

You won’t find many financial professionals, other than fixed-income specialists, recommending big exposure to bonds right now. The outlook is just too uncertain.

“Bonds have nowhere to go but down since [interest] rates have nowhere to go but up.” Liz Young, SoFi Chief Investment Officer

Bonds are not expected to rally or perform better if growth slows, unless there is a meaningful dent in the outlook for inflation, and it would take a very deep and lengthy downturn to do so, as economists and financial pundits have warned.

Bonds have sold off and they haven’t served as downside protection within an investor’s diversified portfolio of stocks and bonds. Year-to-date, bonds have returned -8.7% YTD on 7-10-year Treasury bonds compared to a -6.0% YTD return in the S&P 500.

When bonds are in the red and cash is losing value because of inflation, investors turn to the stock market, at least tactically.

In this environment, “real assets” like real estate and commodities have done extremely well tend to do well in a tough investment environment for the long run (gold, metals, energy — along with globally diversified real estate).

As for stocks, Bill Smead, of Smead Capital Management, likes energy and housing market plays; noted investor Bill Miller likes energy, financials, housing stocks, travel-related names, and even some Chinese stocks (he’s also still bullish on mega-cap tech like Amazon and Meta).

The S&P 500 overall has been impressively resilient thus far, hanging in there with drop of less than 5% since the start of January–less than bonds, in other words. As bond losses deepen, don’t be surprised to see the “TINA” (There Is No Alternative) dynamic continue to bolster stocks.

However, there are several good reasons for purchasing bonds and including them in your portfolio:

  • Bonds are a generally safe investment, which is one of their advantages. Bond prices do not move nearly as much as stock prices.
  • Bonds provide a consistent income stream by paying you a defined sum of interest twice a year.
  • Bonds provide diversification to your portfolio, which is perhaps the most important benefit of investing in them. Stocks have outperformed bonds throughout time, but having a mix of both can lower your financial risk.

References:

  1. https://www.investor.gov/introduction-investing/investing-basics/investment-products/bonds-or-fixed-income-products/bonds
  2. https://www.themoneyfarm.org/investment/bonds/why-is-there-a-market-for-bonds/
  3. https://www.sofi.com/blog/liz-looks-stocks-vs-bonds/
  4. https://www.cnbc.com/2022/03/28/kelly-evans-its-getting-ugly-out-there-for-bonds.html
  5. https://archerbaycapital.com/bond-market-more-important-to-economy/

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining market equity values.

Wall Street Driving Up Rents and Housing Prices

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The government has estimated that the nation is short about 4 million homes, and that number is likely growing.

A good examples of just how wild the housing market has become in Florida, look no further than the city of St. Augustine. A property has been on the market for thirty days with a disgustingly steep price considering the home’s exceptionally run-down (think ugly shabby) condition.

Asking price $349K on Zillow

This house is listed as a “Major fixer upper!!! Property to be sold AS-IS” on Zillow. It’s a 448-square-foot, one-bedroom, one-bath home that has definitely seen better days. The asking price is a whopping $349,000.

With housing in such short supply, Wall Street saw an opportunity, and began buying modest, single-family houses. Once bought, they rent them out. In places like Jacksonville, Atlanta, Charlotte, investors are buying almost 30% of the homes that are available for regular home buyers.

These Wall Street companies come in and buy a home, paying at or above market price for the home. And then, they set a market rent, charging 30%-40% higher rent than the previous owner asked.

References:

  1. https://www.news4jax.com/news/local/2022/03/24/want-to-buy-a-fixer-upper-in-st-augustine-this-1-bedroom-house-is-for-sale-for-349000/
  2. https://www.zillow.com/homedetails/112-Moore-St-Saint-Augustine-FL-32084/47777206_zpid/