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Here’s Why Rising Rates Can Be Good For Bond Investors (AllianceBernstein Blog)
Bond investors are antsy about the coming rise in interest rates, but Douglas Peebles at AllianceBernstein points out that rising rates have positive effects too. Peebles offers a scenario where investors “earn a 3% yield at the outset, but the very next day interest rates rise by 1.25% (125 basis points) and remain at that level for the five-year investment horizon.” The 3.4% price loss in this scenario is offset by a higher growth path, according to Peebles.
“What’s the source of this higher growth? First, as you reinvest the coupon income that your portfolio pays, you’ll be able to reinvest it at higher yields. Income matters: for investors who use bonds to generate income, rising rates change from a threat to an opportunity. Second, as the bonds in your portfolio mature, their price pulls back to par, and you can reinvest their principal value in newer, higher-yielding bonds,” he writes. “…After less than a year, the portfolio’s value is back to its starting point. By the third year, the portfolio has not only caught up to where it would have been had rates never risen, but it’s continuing to grow at this higher rate.”
“In our view, investors with a multiyear investment horizon can feel fairly confident that all but their longest bond investments will be worth more at the end of their investment horizon than they are today,” Peebles writes. “And, if that investment horizon exceeds the duration of their investments, rising interest rates may actually benefit investors’ bonds over time. The challenge is to be patient enough to let time work to your advantage.”
Only 5% of heirs will keep the assets they inherit with the advisor the current generation uses. And that means a lot of advisors risk losing a large part of their assets, according to Vanguard. “While it may feel like a stretch to some, much of the latest research suggests that one of the best ways to achieve this is by the simple yet uncommon act of helping families openly and thoroughly communicate about their wealth and plans for inheritance,” they write.
“The Institute for Preparing Heirs found that 70% failed to successfully transfer assets from one generation to the next,” for three key reasons. 1. “Lack of communication among family members.” 2. “Inadequate preparation of heirs.” 3. “Absence of a cohesive purpose for family wealth.” Advisors should host family meetings with the heirs. “While clearly a win for clients and their families, family meetings can be a win for advisors as well. Being privy to these highly personal conversations affords advisors a much deeper understanding of each heir and the unique opportunity to begin trusted and enduring relationships with a group of prospective clients at once.”
“For all the concern recently in the markets about prospects of Fed interest rate hikes and what it would do to the markets, a glance at history provides clues as to what might actually occur,” writes John Stoltzfus, chief market strategist at Oppenheimer.
“From the end of June 2004 though the end of June 2006 the Fed raised its benchmarked rate 17 times in increments of 25 bps until the benchmark rate reached 5.25%. From the end of June 2004 through the end of June 2006 stock advanced with the S&P 500, the S&P 400, and the Russell 2000 rising 11.34%, 25.87%, and 22.51%, respectively… On 9/18/2007 the Fed cut its benchmark rate by 50 bps. From September 18 through the end of December 2007 the S&P 500, the S&P 400, and the Russell 2000 declined -0.38%, -2.63%, and -5.03%, respectively… It wasn’t the beginning of rate hikes that precipitated the last bear market for stocks, but rather the beginning of rate cuts.”
Market volatility was the biggest concern for advisors in the second quarter, according to survey of 200 advisors by Fidelity Advisor Investment Pulse. 26% said “market volatility, downside risks and avoiding a market meltdown were the primary issues on their radar,” according to FA Mag. Meanwhile, 21% said portfolio management and investment allocation were the biggest concern. “We know that many advisors are thinking about a possible market correction, but at the same time they are looking for ways to find growth and generate income for their clients,” Scott E. Couto, president of Fidelity Financial Advisor Solutions told FA Mag.
Why Clients Should Use Trust Protectors (The Wall Street Journal)
“Incentive trusts can be very useful tools for clients who are concerned about their heirs’ ability to use their inheritance constructively, and want to encourage personal responsibility and accomplishment,” writes Greg Young CEO of AmeriServ Trust in a WSJ column. But this can cause some resentment on the part of the beneficiary because it means they have to meet certain conditions, that will be determined by a corporate trustee, before receiving any money. “Because of that reality, I’m a proponent of clients using a so-called “trust protector.”
“An arbiter of sorts, the trust protector can step in to help interpret conditions of the trust in the case of any disagreement between the beneficiary and trustee. Although the trust protector may have a closer relationship with the beneficiary, it does not mean that they are solely the beneficiaries’ advocate or that their role will put them at odds with the trustee. The roles are meant to work in concert. In many cases the trust protector can help confirm that the decisions being made by the trustee are the right ones and truly in the best interest of the beneficiary.”
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