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A New Fixed Income Paradigm

Mar 5, 2020

Marc Scudillo, Managing Director, and Steve Wang, Chief Investment Analyst, of EisnerAmper's Wealth Management and Corporate Benefits discuss the Quarter 1 Investment Committee Meeting. The fifth part of this series discusses how the extended low interest rate environment has impacted the strategy for minimizing volatility while generating income.

This video was recorded on February 25, 2020. Update to follow. View the full video here.


Marc Scudillo: In a balanced portfolio, you also have a core piece of bonds along the way.
Steve Wang: Correct.

Marc Scudillo:So let's talk about fixed income now. So with fixed income, there is a dilemma that we're facing with such a low interest rate environment that we have, that we discussed back in the 1950s was the last time that we saw rates being this low for this long. From our experiences and from our conversations, we discussed that bonds has a different piece as part of a portfolio than what it used to be. So tell me a little bit about the bond segment of the market, right now, today.
Steve Wang:Sure. Everybody knows that the current interest rates are very low and that's why traditional fixed income, traditional bonds will not be able to provide the stable incomes to support most of the retirees' income needs. That's why we want to be careful, although we know that the fixed income will be used to absorb the typical equity markets volatility and that is still a very important piece of the portfolio. But in the meantime, we want to be careful and flexible in terms of selecting the type of the fixed income to be able to continue to support the income needs as well as reduce the overall volatility of the entire portfolio.
Marc Scudillo:Sure, and we also discussed that the purpose, as you're saying, is that the bonds will add the stability to a portfolio, decrease the volatility, those highs and lows within the portfolio, but not necessarily expect it to be the income generator that it once was consistent in the past.
Steve Wang:That's correct.
Marc Scudillo:And when I say the past, looking at it from the 1970s on, really, where fixed income was paying a rate that people were using to live off of. That was the coupon or the interest that they would receive off of the fixed income to live off of. We need to come up with other mechanisms now for our clients to be able to sustain their lifestyle.

So when we're looking at sustaining our lifestyle, some of the things that we've done to include in our clients' portfolios, besides diversification, besides making sure that not only having the diversification, we focused on the rebalancing process yesterday as to make sure that that's consistent. As certain segments of the markets are going up, we're taking advantage of that and buying into the downturns of some of the other segments of the markets because they turn.

But in addition, we use this phrase, we also want to collect rent from all of these different segments of the market, so tell me a little bit about that as we look at the income that could be generated off of the portfolio.
Steve Wang:That is a part of the research we have done over the past decades, and our managers are trying to focus on dividend growing. We see that the power of dividend growing, which we put together slides to show our clients by investing $200,000 of the initial investment, back in September 2019. Along the way, one of our dividend growing managers will be able to pick up roughly about $91,000 of just the dividend incomes. Those dividend incomes in the current market situation will be very important. Number one, to help absorb the downside volatility of the portfolio. Number two, we'll be able to provide the income needs for our clients.
Marc Scudillo:Correct. And in an expected economy where there might be a slowdown in GDP, we need to focus on other areas than just being dependent from a stock appreciating in price from $10 to $12 for example, but also having the ability to collect the income from that stock along the way to help increase the total rate of return for our clients to meet their goals.

Your Portfolio & Financial Plan

The final part in this series emphasizes the importance of actively managing risk within an individual’s financial plan.

Global Diversification – Past & Future

The fourth part takes a look back at the performance of international markets and diversification.

Current Market Cautions

The third part of this series discusses considerations when repositioning portfolios.

Diversification & Risk Reduction Strategies

The second segment covers how diversification and other risk reduction strategies can help reduce portfolio risk-volatility.

Investment Committee Overview & 2019 Highlights

The first segment of this series is an overview of the committee’s function and composition.

What's on Your Mind?

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Marc L. Scudillo

Marc Scudillo provides financial planning, investment and wealth preservation protection services to both individuals and corporations.

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