Why You Are Overweighted in Bonds

BondsThe fundamental concept behind fixed income investing, especially for retirement investors, is that you are trying to preserve capital while generating enough interest and dividends to enhance your income.  The strategy is also designed to allow you to at least keep pace with inflation.

This has been the conventional wisdom for some time.

But what if it’s wrong?

What if this strategy has you overweighted in bonds and other fixed income securities because inflation is much higher than you’ve been told?

What if inflation isn’t 3%, but closer to 7% in some cities…and as high as 13.7% in major metropolitan areas?

I’m sorry to break the news to you, but that’s exactly what’s going on.  You see, the government has a vested interest in keeping the rate of inflation as low as reasonably possible.  Government payments increase each year based on the inflation rate, which is calculated by Consumer Price Index, or CPI.

Except the CPI is total nonsense.

You know how it is reported as “core CPI”, which excludes energy and food prices?  That should tell you everything.  Don’t you buy food and energy?  Don’t you buy or use those products every single day?  You bet you do.  So why exclude them?

The good news is there is a real inflation index out there, even though it delivers depressing news. The Chapwood Index, created by Ed Butowsky of Chapwood Investments, reports the actual price increase on the 500 most frequently purchased products, the ones that you and I actually buy, including food and energy.  There are no alterations or seasonal adjustments. These are actual prices, measured every month.

As you can see from the link, inflation is through the roof.   It isn’t 3%, and that means your investment portfolio is yielding far less than what you need.

That means you are likely over-weighted in bonds as a whole, under-weighted in munis, and under-weighted in income-generating equities like preferred stocks and REITs.

I know this is bad news.  It shake the foundation of what you’ve always been told about retirement investing.  It requires you to take a deep breath and think about how you should alter your investment strategy.

First of all, you should look at your total asset base and see how much it yields every year right now.  Then you should take the inflation rate for your city from the The Chapwood Index, and calculate how your asset base is going to change from now until you die.  Most actuarial charts put male life expectancy at 84 years and females at 86, but let’s be optimistic and hope you make it to at least 90.

If your asset base runs too low at age 90, or into negative numbers, you need to re-allocate your portfolio.

In the meantime, you should start to investigate REITs, preferred stocks, high-yield ETFs, municipal bonds, business development companies, and exchange-traded debt.  These are all avenues where you can boost your yield without going too far out on the risk curve.

About Lawrence Meyers – Larry is regarded as one of the nation’s experts on alternative consumer finance. He consults for hedge funds and private equity via his Council Member status at Gerson Lehman Group, and as a member of Coleman Research Group’s Executive Forum. He also consults for Credit Access Businesses and Credit Services Organizations in Texas. His Op-Eds and Letters to the Editor have appeared in over two dozen major newspapers. He also brokers financing, strategic investments, and distressed asset purchases between private equity firms and businesses of all stripes. You can reach him at [email protected]

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