If you invested in domestic stock funds during the first quarter tied to one of the main U.S. indexes, well done. With price gains of 13.07%, the Standard & Poor’s 500 index had its best first quarter performance since the first quarter of 1998.
Other key indexes like the Dow Jones Industrial Average and the Nasdaq climbed 11.15% and 16.49%, respectively. U.S. government notes and bonds also performed relatively well, bucking the trend of when stocks do well, bonds generally don’t follow, and vice versa. The DFA Global Allocation 60/40 Portfolio, a mutual fund which attempts to closely replicate a portfolio of 60% equities and 40% stocks, sported a total return of 8.43% for the first quarter.
Not bad, indeed, since conventional thinking says that stocks and bonds tend to behave in opposite ways. When one goes up, the other goes down. If you’ve been following markets for a while, though, you probably know it’s best to consider other factors beyond “conventional thinking.”
Until the final weeks of the first quarter, for example, bond yields were just a bit higher than where they ended 2018. That was until bond investors were caught wrong-footed by a surprise Federal Reserve U-turn in mid-March. The central bank indicated that more interest rate increases weren’t likely this year. Yields fell significantly (when yields decline, prices rise) as investors considered whether U.S. and global economies were sending signals of recession down the road.
Extremely low, even negative yields for government bonds issued by Germany and Japan, for example, also drew attention to U.S. Treasury notes and bonds. Paul Schatz, president at Heritage Capital, told CNBC that the first quarter was “the perfect storm” for investors in a good way. “The rising tide of the first quarter has lifted all ships, debris and just about anything and everything in the ocean,” Schatz said. “The 60-40 portfolio was an easy winner.”
Time for a Rethink?
Whether or not you have some winners or some debris in your portfolio, it might be a good time to think about what to do with a portion of your “at risk” money.
For example, with yields this low, chances are any short-term money coming back to you in maturing CDs could pay even less than what you were able to get several months ago. As the folks at Bankrate say, waiting around for a higher yield doesn’t make sense at this point in time.
“CDs are competing with Treasury securities for capital and yields on Treasuries have tanked, so there is certainly latitude for banks to scale back their payouts,” says Greg McBride, CFA, Bankrate chief financial analyst. He adds, however, that competitive forces may prompt some banks to hold their savings account and CD payouts steady for a while longer.
Apart from CD yields, also consider when and for what you will need your short-term money for. “The decision about whether a CD is right for you is not predicated on the rate outlook but more so on your need for the cash, the timing of that need, and your ability to withstand any volatility in return or risk to your investment,” Bankrate’s McBride says.
On the indexing side of things, check out whether you’re paying higher fees for index products. The major fund powerhouses continue to lower fees, some as low as $3 or $4 per $10,000 invested on S&P 500 exchange-traded funds, for example. Consider the tax implications before simply selling one fund to get into a cheaper one, as well as the transaction costs, however.
So what’s next for your portfolio, your financial plan and your strategy for retirement income? We’ve got you covered with an approach that can offset market volatility, and let you participate in a portion of market upside with protection and income guarantees. Our network of tax professionals can also answer any questions about capital gains or losses and what the impact could be on your tax returns.
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