HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
So says Bill Gross of PIMCO, as reported on Bloomberg. Gross is a very smart man. He has been a Barron’s Roundtable member for years and manages the world’s largest bond fund.
This is an important article. Please read it carefully and think about it because it will affect your portfolio for years to come.
Interest rates peaked in the early 1980s, with the prime rate above 20% and the coupon on the 30-year Treasury at 15%. Gross feels that the almost three decade rally in the bond market may be drawing to a close, because excess borrowing in countries such as the US, UK and Japan will eventually lead to inflation (see the chart of the 10-year Treasury note on page 3. On Friday, the stock market was closed but the bond market was open for a half-day. The interest rate on the 10-year note was up another tick to 3.94% and is on the verge of breaking out to a new multi-year high).
Under what PIMCO calls the “new normal”, investors should expect lower-than-average historical returns with heightened government regulation, lower consumption, slower growth and a shrinking global role for the US economy.
(RMD comment: The stock bull market of the 80s and 90s narcotized investors to “expect” 10% compounded annual returns. I think if you can realize a 6 or 7% return for the rest of this decade you will be lucky. This is especially important if you are retired or approaching retirement. It is better for your projections to be realistic rather than inappropriately rosy).
A quick review is in order. Bonds are hurt by rising inflation and interest rates. For example, say you purchase a 10-year bond paying an interest rate of 3%. One year later this same bond now yields 4%. No one will buy your bond paying below-market rates at face value when the can go next door and receive a better rate. You must discount your bond (i.e., sell it for less than face value) so the buyer can realize a competitive market rate. Bottom line: falling interest rates are good for bonds, rising interest rates are bad.
If Gross is correct, and I believe he is, this is what I suggest:
1) Decrease the allocation of bonds (fixed-income) in your investment portfolio.
2) Shorten the maturity of the money you keep in fixed-income investments. If interest rates rise, a 5 or 10-year bond will lose less value than a 30-year bond, where your money is locked up longer.
3) Over the long term, because stocks are real assets, they tend to track inflation fairly well. Note that last December PIMCO for the first time offered a stock fund (I am on the board of a small foundation. Late last year I had our asset allocation changed to decrease fixed-income and increase stocks (equities).
4) Fix the interest rate on any adjustable-rate note(s) you may have.
5) I can never in good conscience suggest you take on debt, but, if you are a speculator, now may be the time to lever up with a fixed-rate note. If you purchase something with debt, and pay it off in the future with cheaper dollars that are easier to come by, you could make a killing (Of course, if things go against you, you will get killed, as the world’s financial system discovered over the last few years).
6) Buy the precious metals, which will be the subject of the next issue.
RMD
Friend Diane was looking for a ring to wear to celebrate the birth of her first grandchild. The pawn shop wanted $150.
My Uncle George, after he lost his job of 29 years when General Steel closed their Granite City plant in the mid-70s (my father lost his job of 37 years and hired on as a custodian at the School Board), took a clerical job at the May Company (Famous-Barr) and also frequented the local pawn shops to make a few extra bucks. He told me that whenever he had difficulty closing a deal, he would put the merchandise he wanted in one pile, put the cash he was willing to pay in another pile, and say to the owner “Which pile do you want?” He was only turned down once. Cash is king.
So I told Diane about “Uncle George’s Rule”. She went back to the pawn shop, looked at the ring, put $115 in cash on the counter and said “Which do you want”. She got the ring.
For several years I had a patient who was a bounty hunter. Take my word; they are tough guys. He had a small, flat leather pouch about 3 inches in diameter that hung from his neck by a leather strap (I think it was a derringer). The first time I examined him, I used the thumb and forefinger of my left hand to gently hold it aside so I could listen to his heart.
He looked up and said “Doc, don’t ever touch that again”.
I thought “No problem, man, whatever you want”.
Several weeks ago we went out to eat at HuHot, a Mandarin restaurant. When I found out it was pronounced “Who Hot”, I said “You hot, me hot, we hot, who’s hot…who’s on first (my mind jumps around like that).
I suggest you go to YouTube and watch the Abbott and Costello routine “Who’s on first”. It is arguably the most clever word play ever.
Who’s on first.
What’s on second.
I Don’t Know’s on third.
Why is in left field.
Because is in center field.
Tomorrow is the pitcher.
Today is the catcher.
I Don’t Give a Darn is the shortstop.
The name of the right fielder is never given.
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