Between a Rock and a Hard Place

Investors are having a tough time finding a safe haven for cash in stressful situations. Recent geopolitical disruptions, including a downed Russian airliner and terrorist attacks in Paris, would usually send investors straight to bastions of reliability like United States Treasury bills or, internationally, German Bunds. But with the Federal Reserve widely expected to raise interest rates before the end of the year and short dated Bunds offering only negative yields, those options may not be attractive. What’s worse, T-bills and Bunds have both been extremely volatile lately. With the United States economy improving modestly, investing in dollars seems like a suitable alternative, but their value is undermined by inflation, and unlike bonds they offer no accruing interest as an offset. So what should bond investors do? Thankfully, decades of investment research come to bear in times like these. The answer is to keep investing, stay diversified, keep costs low and mind the tax implications. These principles guide our trading activity here at SNWAM. We intentionally limit portfolio turnover to keep trading costs to an absolute minimum (indeed, our portfolio turnover is less than that of several bond index funds, allowing us to pass the savings on to our clients). If Treasury bills are a little volatile now, it likely will not matter in the long-term, and for that reason, we avoid executing based on short-term events. So if you feel you are stuck between a rock and a hard place, and find yourself asking where you should invest, just remember that staying the course is likely the most prudent option.