A Challenge to Traditional Investing

Interest rates are low. But what’s really changed?

A Challenge to Traditional Investing

The short answer is, “everything.” The traditional investment paradigm is no longer adequate to meet return objectives.

In the past, many investors met return goals by constructing core equity-bond portfolios. The equity component provided healthy returns over many years – often in the double digits. And bonds provided diversification benefits to reduce risk. Not to mention that the decline in interest rates over the last several decades boosted fixed income valuations. But now that there is little room for further reductions in interest rates, the fixed income space is challenging.

With the extraordinary decline in interest rates in all the major developed economies, bond yields are at historical lows. The global treasury index is below 1%. Yields on Swiss bonds and German Bunds are negative. The US yields are a bit better – above 1% and about 2% for 10+ year treasuries – but still well below historical yields.

With the core corporate benchmarks, the yields are also low. The Euro Aggregate has a yield below 1%. The Global Aggregate and US corporate yield are in between 2 and 3%.

So the traditional investment paradigm has been upset. And with this “Lower for Longer” environment as the new normal, new investment strategies are required.