Bob Smith, president and chief investment officer of Austin, Texas-based Sage Advisory Services
There is a temptation to take profits here; people are going to be looking to do that in terms of their tax-loss harvesting. I think it’s crucial not to abandon fixed income altogether in the face of this increase in interest rates.
I was recently at two client meetings and I watched two consultant firms scare the trustees about how harsh or bad it’s going to be for fixed income, and that they should really be eliminating their fixed income.
And I’m saying: “Whoa, hold on!” First of all, for most of these clients that were at this table, their longest maturity is five years. And in 1994, for debt that was five years and in, and three years and in, investors made money on that part of the curve. Yes, you do make money in fixed income when rates are rising! The question is, What kind of fixed income?
So, again, don’t abandon fixed income, just find the safer place in fixed income. And fixed income is your anchor to windward. So if you’re sitting here at a market high that you’ve never seen before in U.S. equities, the ballast in your portfolio—fixed income—should remain so.
But it should be a different kind of ballast. Let’s make it a little bit more conservative. Don’t abandon fixed income, is the message; just find a safer place in fixed income. Because there may come a time early next year when we get a 10 percent correction in equities, and you’re going to wish you had your bonds.