As I prepared for this article I realized that there are so many myths about investing. One myth is the concept of a balanced portfolio. A balanced portfolio are how stocks and bonds are supposed to offset each other. So I can properly explain why these myths are giving us a false sense of security I thought I would start with a quick definition of the two markets and the concept of a balanced portfolio.
What is the Bond Market?
The bond market, also called the debt market or credit market, is a financial market in which the investors are provided with the issuance and trading of debt securities. The bond market primarily includes government-issued securities and corporate debt securities, facilitating the transfer of capital from savers to the issuers or organizations requiring capital for government projects, business expansions, and ongoing operations. Definition courtesy of Investopedia.
What is the Stock Market?
The stock market refers to the collection of markets and exchanges where the issuing and trading of equities (stocks of publicly held companies), bonds and other sorts of securities takes place, either through formal exchanges or over-the-counter markets. Also known as the equity market, the stock market is one of the most vital components of a free-market economy, as it provides companies with access to capital in exchange for giving investors a slice of ownership. Definition courtesy of Investopedia
A Balanced Portfolio
Bonds in the past have been a way to balance your investment portfolio. The traditional approach used by many financial planners or advisors is 60% stocks or equities and 40% bonds. The theory is when stocks are up, bonds are down and when bonds are up, then stocks are down. Below is a 222-year chart that shows the balance between the S&P 500 and Interest rates (bond prices are reflected by interest rate change). Interest rates actually slowly went down as the S&P 500 slowly went up in value except for the depression of 1920-1921. That’s where interest rates jumped to 6% only to drop to 3.5% by 1926. Also during that time, we had the roaring twenties. We had the most stock growth ever at that time only to see it all go away in 1929 with the start of the Great Depression.
Then it changed
After World War 2 we enter a period of tremendous growth and accelerating inflation like we had never seen before. This was one of those times that you made money no matter what you invested in. Bond yields kept going up and stock prices did the same. If you were a financial planner your balanced portfolio just made money.
Debt and Baby Boomers
Now as we head into the bull market of 2017 and 2018 we are now starting to see, after a decade of the lowest interest rates in US history, that interest rates are going up. In normal times that would be a good thing but we have two major issues that are going to keep both the bond market and stock market volatile. The two are 20 trillion in national debt and 10,000 baby boomers retiring every day.
The first issue is debt. If interest rates go up then debt interest goes up. With a national debt of $20 trillion all we need is for interest rates to go up 1% then “we the people” will have to pay $200 billion more per year in interest. To truly understand the effect on our economy, we just passed a tax cut bill that saves in taxes, $1.5 trillion over 10 years or $150 billion a year. So if interest rates go up 1% it will more than wipe out the full benefit of the tax cuts. I am no economist but the US cannot afford to raise interest rates until the debt is addressed and I do not believe that is going to happen anytime soon. Get used to continuing low-interest rates.
So why are low-interest rates so bad?
Well, 10,000 baby boomers are retiring a day. They need income and as long as interest rates stay low they are not going to have low-risk investments like CDs or money market. Also, the bond market will still be producing low yields. That means these investors are going to be forced into much higher risk investments. Meaning the current stock market is going to stay extremely volatile. We also have another twenty years before we see the end of the baby boomer bubble and the high demand for income.
So what is the answer?
Stop investing in markets and start investing in business opportunities that are not affected by the markets. There was a time when you would follow a company that was doing well and when they went public you would invest in them. The problem today is when these companies go public the investment bankers make millions and the average stockholder gets stuck with a manipulated stock price. Also, the only way that investors can get income is through a dividend-paying stock or bond fund. The sectors that pay the highest yield are listed below.The Financial sector is the highest paying and it averages 3.72%. Remember when the bank paid you 5% on your savings?
Besides stocks and bonds, there are still other investments out there. What if you could invest in a business as a limited partner and that business bought farmland and then converted it to organic. What if after the conversion the farm could produce 2.5 times more profits than the non-converted farmland. That 80% of the profit would be paid to the limited partners and that would be equivalent to at least an 8% return on their investment and could be higher.
Then after 10 years, the investment is liquidated and the limited partners receive 80% of the profits from the sale of the land that would be equivalent to getting back double the amount they initially invested. In addition, you have a team of people to not only overlook your investment but would also be available to answer any of your questions. And last what if this investment actually helped local farmers succeed while giving consumers healthier farmlands and more nutritious grains.
If this interests you please contact us at Sustainable Farm Partners (SFP) or go to our website, www.sustainablefarmpartners.com. If you qualify we can send you out a Private Placement Memorandum (PPM). A PPM is the document that discloses everything the investor needs to know to make an informed investment decision prior to investing in a Regulation D Offering. Unlike a Business Plan, the PPM details the investment opportunity disclaims legal liabilities and explains the risk of losses.
CEO, Director of Farm Management & General Partner
Sustainable Farm Partners, LLP
Emmetsburg IA – Santa Fe NM
W: (505) 663-6034
C: (650) 804-0198
When a flower doesn’t bloom, you fix the environment in which it grows, not the flower. – Alexander Den Heijer