Broker Check

March Client Update



February 28, 2018


Yes Virginia, Bond Values Do Go Down When Interest Rates Increase.

 On Monday February 26, the US equities markets rallied and generally recovered from the considerable drop earlier in the month when investors fled from risk assets (equities) in favor of the perceived safety of bonds.  On Tuesday, as the new Chairman of the Federal Reserve gave his first testimony to Congress, the S&P 500 shed 1.26 percent of its value as investors interpreted his comments to mean that interest rates could be raised four times in 2018 (up from the previously expected three times).  This volatility appears to reflect the recurring “bond jitters” that sent the markets tumbling earlier this month.  The equity market slide came after Chairman Powell’s acknowledgement of a strong economy, an improved labor market and inflation moving up to the Fed’s target rate.  Who knew that bad news could be generated from such good news! Also of significance, Chairman Powell indicated that the Fed would begin selling off bonds, in the second half of 2018, which were bought during the economic recovery period.

Like most investment advisors, we are weighing the potential impacts of the inevitable rise of interest rates and growing inflation; both can be cause for concern due to the drag on corporate earnings and equity valuations.  Although four rate increases over a relatively short period could cause some market movement, we (and most advisors) do not believe that the rate increases will happen quickly.  We believe that 10-year treasury rates rising above three percent are no reason to panic, but it could cause more turbulence as some investors start to sell equities and move into bonds that are now paying higher rates then we have seen since 2008. The economists at Bank of America have projected that the US Treasury will continue to issue more debt that will exceed one trillion dollars in the next two fiscal years.  Bank of America expects the yield on the ten-year Treasury note to rise to 3.25 percent.  If that were to happen we would be looking to buy more high quality equities as we rebalance portfolios to more traditional equity and income ratios.  

We certainly do live in interesting times as we watch and follow the outcomes of both the fiscal and monetary policies that are currently in play.  The good news is that our globally diversified portfolio of equity and income securities is well positioned to ride out the bumps in the road.  To that point, all planned for withdrawals from client accounts continue to be fully funded through a combination of maturing bonds and CDs, as well as steady cash flows from interest and dividend payments.  For those accounts invested for longer-term growth, the expected volatility will allow for continued accumulations of high quality equity assets at potentially bargain prices.

Looking back over the one and five-year periods ended February 28, 2018, our aggregate portfolio of globally diversified equity and income investments produced the following results:

Both equity and income valuations can go down as markets and investors adjust to the new reality of rising interest rates.  Over the long-term, equity valuations should regain market value based on growth in corporate earnings and continued strong underlying economic growth.  Our equity portfolio continues to emphasize strong dividend paying funds that are expected to maintain nice dividend payments to investors.

On the income side, bonds, CDs and alternative income securities will suffer valuation declines, because of increasing interest rates.  Bonds and CDs will continue to generate steady cash flows and the full principal amounts will be paid upon maturity.  Alternative income values will fluctuate, but they will continue to pay dividends at attractive rates.   Overall client portfolios will continue to see meaningful cash flows in spite of any unrealized valuation declines that may result from higher interest rates.

In late 2017, the SEC issued new regulation clarifications and changes for “standing instructions” that authorize the movement of client assets by advisors.  These changes were enacted for the benefit of clients who work with an advisor.  In order to comply with the new rules, all requests for disbursements will now need to be in writing and we will need advance notice for all cash requests.  It further means that we will have to update instructions already on file for cash distributions, ACH and wire transfers, as well as transfers of funds between accounts held at TD Ameritrade.   Over the next few months, Laura will be contacting you to initiate and process these forms for effected clients.

Due to recent tax law changes and industry regulation requirements, Intelligent Investment Management, LLP will change how we identify which client account(s) to bill for our investment management services.  Let me emphasize we are not changing the amount of the billing for our services, just the process for determining which account(s) we will bill, beginning with our April 2018 invoicing.  Additionally, we will now distribute all invoices electronically to all clients with email addresses on file. From a financial planning perspective, clients can benefit from having their fees deducted from their traditional IRAs as billing this type of account would reduce the future taxes IRA assets would be subject to once they are distributed.  Please call us if you currently only have retirement accounts that we manage and would like to establish an individual or joint account to be billed instead of your Roth IRA account to keep the tax-free growth in tact for that account. 

In news around the office, James recently completed another professional designation.  He completed the Accredited Wealth Management AdvisorSM (AWMA®) coursework and testing through The College for Financial Planning.  The AWMA designation addresses the unique needs and risks that investors and their advisors face in meeting client’s investment goals. The course work covered investment risk analysis and strategies, considerations for business owners, investment implications in income tax planning for high net worth clients, executive benefits and estate planning for high net worth clients.

As always, please contact us if you have any questions. 



Intelligent Investment Management, LLP

Steve  Wheeldon                 James Brost             Laura Vaughan