Wall Street for Dummies Oct 27, 2023

For the past year, the financial media and their Wall Street acolytes have devoted one week a month to catastrophizing about the next Fed proclamation. This week, the flummox de jure was The Fed chairman’s talk at the New York Economics Club. In it he gave the awaiting world an uncharacteristic Freudian slip. He said, and I quote, “The bond market is in control.” ?

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In just 3 weeks, the bond market – not the Fed - has pushed the yield on the 10-year Treasury from 3.8% to just slightly over 5 %, sending both Mr. Bond Market, and Mr. Stock Market into a tailspin.

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The conventional wisdom is that bonds are safe. The answer is sorta yes and sorta no. If you buy a 10-year Treasury bond and hold it to maturity, there is a 100% probability that your will get your principal back, along with all the interest payments due to you. In an environment where inflation is benign and interest rates are stable, everything is copasetic.

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But when inflation, and it’s ugly step sister, rising interest rates, invade the scene, all bets are off. At maturity. you will get your money back, but it’s value will be reduced by inflation. And if you sell the bond before it matures, you will receive less than the principal value you paid for it.

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Since the time when Moses was a pup, brokers have pushed the notion – and collected handsome fees for it – that the proper asset allocation for retirement funds was a 60/40 bond-stock mix. If the value of your stocks slip, you have the safety of your bonds to prop up your portfolio. But, when both the bond and stock market are in decline, the peanut butter hits the fan.

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Where do we go from here? Investing is not a one size fits all proposition. When it comes to retirement funds, investors fall into two major groups. The first are those with a relationship with either a broker or Certified Financial Planner. There is a high probability that their assets are in a robo account that will continue to manage assets in the above formulaic manor. ?

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There is a sizable number of investors with retirement dollars on deposit at a discount/internet brokerage firm A majority of these accounts are self-directed by the account owner. The quarterly earnings report of the internet brokers show that their income declined because their clients moved assets into money market funds that return 5% the investor and nothing to the brokerage firm.

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Disclaimer: everything I have just told you is based on anecdotal evidence from the Wall Street Journal and Barron’s Magazine. The reason I am telling you this is not to convince you that one approach is good and the either evil. My mission is to make you aware of the choices available to the investing public.

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