Defining Risk… Potential for Permanent Capital Loss

Interest rates today are inadequate for our retired clients to sustain their lifestyles…. Period.. End of Sentance!  We believe income is overpriced today because of the distortion created by the Federal Reserve Board’s policy of holding short-term rates near zero.  We are constantly looking for ways to increase the income in portfolios, but we don’t want to overpay for that income.  We feel like most investors are blindly taking on substantial risks that they don’t understand.  Bill Nygren states the problem very frankly:

The 30-year U.S. Treasury Bond today yields about 2.7%. Just 10 years ago, its yield was 5.8%. If five years from now the yield simply returned to its level of a decade ago (and just in case you think I’m cherry picking, over the past 25 years it has averaged a 7.5% yield and at the low in 1981 was twice that), bond investors would suffer a meaningful loss of capital. The principal of the bond would decline by 43%, which would swamp the 14% interest income received over five years, leaving a total loss of 29%.

We feel the average investor that wants and desires a “low-risk” portfolio today is at the greatest risk of being severely dissapointed during this decade.  In our mind, being safe is being risky!