I Want To Grow My Money...Why Would I Need Any Income Investments?

But I’m looking to grow my money. Why would I want income investments in my account?”

This is a common question I get from Wela clients as we talk through the process of developing a retirement savings portfolio to meet their particular objectives. It’s a great question that makes sense. And here’s the answer.

When we think about saving for retirement, we often visual our efforts as growing something -- a “nest egg” that expands with every deposit we make in our retirement account.

But a well-crafted retirement strategy is actually more like a machine than an incubator. It has several moving parts that work together to leverage your contributions and move you towards your goal. The twin motors in that machine are growth and income investments, which work together, with each taking the lead at different times in the journey to and through retirement.

Income investments

Income investments

Growth stocks are shares in companies that currently prioritize expansion and increased market share. These businesses pour most of their profits back into operations, and thus don’t pay dividends. Netflix and Amazon are good examples. If/as a growth company expands, investors benefit from the steady, sometimes dramatic, rise in value of their shares. Growth stocks are what people talk about at the office coffee machine. “Yeah, I bought Acme Corp at $10 a share five years ago and just sold it for $71.”

Income stocks are boring by comparison. They tend to be established companies in mature industries – think Proctor & Gamble, Apple, Disney – that are unlikely to show dramatic growth in share price. Instead they just ton the revenue and pay their shareholders a regular dividend.

Related: Income Investing - Cut Through The Clutter

Bonds, which are essentially a loan to a business or government, are another source of income, as owners of the bond receive regular interest payments. Investors can also receive income from alternative investments, including real estate investment trusts, preferred stocks and shares in pipeline and energy storage companies. All of these assets are traded on open markets like stocks and bonds.

So, let’s assemble Wela’s version of the retirement investment machine. It consists of three buckets based on the above – stocks, bonds and alternative investments – designed to grow your money while providing diversity to protect you from market volatility.

Stocks – During most of your working career, your portfolio should contain mostly shares in growth companies. Ideally, these stocks will significantly appreciate in value over the years and decades, providing a nice profit when you liquidate them in retirement.

But you should also hold some income stocks to provide diversification and stability. The dividends these shares pay can be reinvested in your portfolio, turbo-charging your growth.

Related: How To Build Your Investment Portfolio To Meet Your Retirement Needs

When you retire, we recommend shifting your focus to income stocks. You can continue to reinvest their dividend income, or use it to help fund your lifestyle. Income stocks also tend to be less volatile than growth shares and thus offer the stability you want in retirement.

Bonds – Contributions to this bucket are invested in a diversified range of bonds – Treasury municipal and corporate – that will provide a steady stream of interest income while protecting your principal.

Your portfolio should hold a greater percentage of bonds (as opposed to stocks), as you get closer to retirement. We recommend, “owning your age” in bonds. When you are in your 40’s, bonds should make up 40% of your portfolio. When you are 50, that percentage should be 50%.

Related: Why You Should "Own Your Age" In Your Investment Portfolio

Alternative investments – This smallest bucket of non-stock or bond assets provides more income and some insulation from the gyrations of the stock market.

So, why should you hold income investment when you’re seeking growth? Because income investments – stocks, bonds and alternative investments – can both enhance and protect that growth. The dividends, interest and other payments generated by income assets can be reinvested, even as those assets themselves insulate you from volatility by providing diversity and stability.

Your investment machine isn’t hitting on all cylinders unless you have income assets in the fuel mix.

Disclosure: The information is provided to you as a resource for educational purposes only. Nothing herein should be considered investment, legal, or tax advice. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results when considering any investment vehicle. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. It is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax, or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.

Fed Meeting To Result In Rate Hikes, Or Maybe It Won't, Or Maybe It Doesn't Matter?

It seems like de-ja-vu. In September we talked about the Fed possibly raising rates… they didn’t. The conversation happened again in October… nothing. Here we are in December having the same conversation.

The December jobs report, which looks at job creation in November and adjusts for prior months, was strong. It showed that we added 211,000 jobs in November and we adjusted prior months (which were deemed poor jobs months) very handsomely.

Inflation is muted, but we have started to positive trends with wage growth (trending higher) and unemployment (trending lower). Combine this with a Fed that is anxious to at least get off of 0% interest rates, you get a December full of talk surrounding whether the Fed will raise rates.

The consensus is that the Fed will finally get off of 0% interest rates and raise short term interest rates 0.25% on December 16th. But it seems that the strategy for the Fed will be one of raise and pause. They aren’t committed to raising rates at every meeting as we have seen during past rate increase periods. Rather, this Fed will likely raise in December and then pause for a couple of months. Actually, we are only anticipating 3-4 rate increases in 2016.

Our economy is not out of the woods yet and this is why the Fed is looking to take a “raise and pause” approach. As mentioned earlier, inflation is still muted, which means drastic monetary tightening measures are unnecessary. We still need to see wage growth accelerate much faster than we have recently seen. The trend has been good, but for a consistent rate increase policy, wage growth needs to be accelerating much faster.

So, what does this all mean to you?

Despite a small rate hike this month, the Fed is still, from a historical measure, very accommodative. This means that borrowing money is still easy. In all honesty, is paying 0.25% that much greater than 0%? We are talking about $250 on $100,000 borrowed. That’s still very accommodative for the Fed and positive for markets. Furthermore, does the Fed raising interest rates by 0.25% prevent Apple from releasing the next iPhone or Apple TV? Or will Tesla cease to innovate automobile technology because the Fed decided to move rates by a quarter of a point? We certainly don’t think so.

Also, investors are forward looking. What this means is that they usually build assumptions into what they are willing to pay for investments. Meaning that value movements in investments tend to occur before news on particular events hit the wires.

We can already see this within the Treasury bond market. The 10-year treasury bond is what many people tend to use as a gauge for the bond markets. In October the 10-year treasury yield was below 2%. Today, the 10-year treasury yield sits near 2.30%. Remember that when yields rise, prices fall. What this shows is that investors have already sold treasuries prior to the Fed meeting.

Looking at shorter term treasury bonds is more telling with regards to the Fed, because the Fed really controls short term rates. So, looking at the two year treasury yield, it has moved from 0.55% on October 14th 2015 to 0.95% as of Monday December 7th. That’s a jump in yield of 73%. But the Fed does not control the intermediate or long term interest rates. So, we wouldn’t be surprised to see a flattening of the yield curve. Think of the yield curve as a graph that charts different interest rates across different time periods. So the further out on graph you go (i.e. longer time horizons) should yield higher interest rates. This is to compensate the investor for committing their dollars for a longer period of time. And conversely, on the short-end, you would expect to see lower interest rates since the investors dollars are not tied up for very long. In the case of a flattening yield curve, you would see short term rates rise quicker, on a relative basis, than long term rates. If this happens, then you’ll likely see intermediate and long term bonds hold their value.

Investors are already anticipating a rise in rates in December. That is why we don’t anticipate much fallout once the Fed makes the actual announcement. This is one of the reasons the Fed has tried to be so transparent all these years.

And with this information, what should you do?

Very simply… stay diversified. An announcement by the Fed in December to raise rates, shouldn’t drastically alter your investment allocation or your goals and objectives.

We want to continue to maintain the appropriate exposure to both stocks and bonds. Both of these types of investments serve a purpose… a great purpose. Stocks help us to see some appreciation over the long term, while also proving, historically, to be a good hedge against inflation. And bonds will continue to be a good option when we experience stock market volatility.

Long term investment success will be determined based on staying true to your longer term investment philosophy. Keeping your core (or majority) of investments in core investments like the broad stock and bond market. And then adjusting your allocation accordingly as you near retirement or as your goals and objectives change.

For Wela clients: We are always here to chat with you. News headlines will be abundant over these next few weeks. Trust that we are aware of what is going on and if needed will make necessary adjustments for you and your portfolio.

How Will The Federal Reserve Raising Interest Rates Impact You?

After 80 months, the Federal Reserve is getting serious about ending their zero interest rate policy. There has been speculation that this would happen since the beginning of the year, but at the Fed’s next meeting on September 16 and 17 the “zero rates” will most likely die and a new cycle of higher interest rates will begin. Understandably many investors are nervous about how a rate hike may impact the American consumer.

Investors are already on high alert after our most recent market correction and China’s economy seeming to slow. Adding to this anxiety, financial experts are clamoring to say which way the Fed will go. Bill Gross, a bond guru, and Rick Rieder, Blackrock’s CIO of Fixed Income, are both calling for a September rate hike. On the other side, Christine Lagarde, the Managing Director of the International Monetary Fund, does not believe that the global economy is ready for a rate hike.

Taking a step back, we as investors have to understand that the Fed hasn’t raised interest rates since 2006, and in fact, interest rates have been at historic lows since 2008. The Fed did this so that borrowing money for most people and companies would be inexpensive and, therefore, increase spending and stimulate the economy. That’s why things like mortgage rates have been so low in the past few years.

It might sound tempting to simply keep interest rates low, but money can’t be almost “free” forever. Eventually, the rates have to go back to a more “normal level.” To give the “normal level” some perspective, remember that the Fed Funds Rate, which has been kept at zero for so long, was in the 4 to 5% range in 2006 and 2007.

The Fed will eventually have to raise the Interest Rate, but people are wondering if now is the best time. Sure, with the threat of a raised rate, perhaps more people will borrow money now before it gets expensive again. Raising rates will also tell the world that we are confident in the U.S. economy and that it’s strong enough to handle it. People are nervous, though, that making money more expensive again will damper consumer spending.

Now that you understand the “why” part of the Fed rate hike, let’s circle back to the important question of how it will impact you. Personally, I don’t believe that a small percentage rate increase will negatively impact consumers in the short-term. However, over an extended period of time a series of increased rate hikes will certainly impact everyone. Knowing that the Fed will raise rates sometime soon, now is a great time to make sure your finances are ready for the rate hike. Here are three ways I suggest you start:

  1. Reduce variable debt – This includes debt like student loans, auto loans and home equity lines of credit. Even if you only have debt in one of these areas, you’ll want to try and pay down that debt. While you might not feel the effects of one small rate hike, you’ll definitely feel the pain as additional rate hikes are added down the line.
  2. Consider transferring your credit card balance – It’s likely that credit card interest rates will go up if the Fed raises interest rates. If you’re carrying a lot of credit card debt then your monthly payments could increase substantially. I suggest you spend time now looking for zero-percent balance transfers or introductory rates.
  3. If you have an adjustable rate mortgage, consider refinancing – This is a good time to lock into a fixed-rate mortgage. Like I said above, the Fed raising the interest rate by a small percentage should only minimally impact your monthly payments now, but with additional interest rate hikes over time those payments will continue to grow.

Bottom Line

At Wela, we’ve been preaching about staying calm and not panicking over the market volatility or China. We’re going to say the same thing about the possible Fed rate hike… don’t panic. Just like you can’t control the markets, you can’t tell the Fed to hold off on a rate hike. Instead, focus on what you can control. Reduce your debt to avoid unnecessary financial pain in the future.

The Bond Market Bubble

Every day I turn on CNBC or listen to Bloomberg, I know one thing… I will hear someone talk about a “Bond Bubble.” They have been talking about it for years, but we have yet to see it. We know a bubble… just imagine blowing a bubble gum bubble, and then it pops all over your face! That’s similar to a financial bubble which is essentially when an investment type (think real estate, dot com, etc.) grows to be too large, and then pops and splatters all over our face creating a huge mess.

Before we can even worry about the Bond Bubble, though, we need to better understand bonds.

The bond market is quite interesting and doesn’t get the hype the stock market does, but it should. A quick fact many may not know, the bond market is actually bigger than the stock market!

Now to explain how bonds work, think back to when you have lent a buddy of yours $20 bucks. Because she is our friend, we trust she will pay it back. However, if we were to be formal, we could write up a document that she would sign saying she’ll pay us back with some interest. It’s similar to our mortgage, but we’re the bank. That document we have then created is a bond… an obligation by someone else to pay us back with interest.

Alright, so that simplified it. Now let’s talk a little about how bonds work within our investment portfolio.

Imagine a bond is a seesaw with the price of the bond on one side and the yield or interest rate the bond pays on the other. As one side goes up the other side goes down. For example, if the bond price goes up, the interest rate goes down and vice versa.

Now imagine that the seesaw is really long, and on each side of it, we  have multiple bond prices and multiple interest rates. The swings in the seesaw (or the impact of motion) are typically smaller for the prices and interest rates closest to the middle of the seesaw (fulcrum), but those that are all the way on the ends will see huge swings.

That’s how you can think about the difference of the seesaw swing in prices and interest rates relative to the length of your bond. The longer the bond, like a loan you give to your friend for 10 days versus one you give to them for 10 years, the greater the impact of the seesaw.

Alright, last piece I think it is necessary for us to touch is that there are different types of bonds.

We have many different types of bonds… for instance, the risk associated with loaning Home Depot money is less than loaning money to the kid in your neighborhood trying to develop a new app.

Go back to that example of us loaning our friend money. If the friend that we are loaning money to is responsible, we know they have a good job, they tend to pay us back on time… then we will charge them a lower interest rate. Let’s call this person Jimmy B Good.

On the other side of this, if we have another friend who is a nomad, moves from place-to-place, can’t hold a steady job and continues to ask us for money, then he poses a higher risk, and we should probably charge him a higher interest rate. Let’s call this person Johnny B Bad.

Jimmy B Good vs Johnny B Bad is a similar battle that is experienced in the bond market. You have Jimmy B Good companies that are deemed by investment professionals to be “investment grade.” Then you have Johnny B Bad companies who are “high yield,” but they are riskier. Having a mix of both Jimmy B Goods and Johnny B Bads can be a positive as it adds diversification to the portfolio!

So, despite the recent headlines about rates rising and a possible bond bubble, it doesn’t necessarily impact all bonds equally. It impacts different bonds in different ways, typically based on the term of the bond or the type.

Now while that’s all great, your next question is probably, “Well, I have bonds in my portfolio, and they fell this week… what do I do? I don’t want to have this bubble pop on my face.

I would respond to this question with another question, “Why are you holding bonds?” I’m guessing your answer is likely, “To help keep my whole investment portfolio, which is made up of stocks and bonds, from falling when the stock market falls.”

This past week stocks didn’t fall, and thus the bonds did not see any action. However, we want to hold onto bonds for when the stock market does fall. That is diversification at its finest. Don’t buy into the hype of the headlines. Be sure to chat with one of our Wela advisors if you have any questions about how bonds function as part of an investment strategy.


This information is provided to you as a resource for informational purposes only.  It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors.  Past performance is not indicative of future results.  Investing involves risk including the possible loss of principal.  This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions. 


March Madness is a great event for any sports fan. Thursday and Friday are filled with games throughout the entire day. Fans fill in their brackets with the mentality that this year’s bracket is going to be much better than the previous year. Then the games begin and the upsets start rolling in. We see 14 seeds upset 3 seeds and 10 and 11 seeds begin to make the Sweet Sixteen. This year already we have seen Dayton drop Syracuse, Stanford beat Kansas, Harvard beat Cincinnati and our own Mercer Bears beat Duke.

The uncertainty that surrounds March Madness is what makes it fun. The joys we get when one of our upset picks delivers, the disgust we feel when one of our Final Four teams exits the dance early. And then the gut wrenching feeling we have when our chosen champion falls out of the tourney early (which is my feeling right now).

Through the entire tournament and the roller coaster of emotions, the root cause of our reactions/feelings is due to the uncertainty that surrounds the tournament.

I think that this feeling towards uncertainty is the same for any situations that are clouded with uncertainty.

Anxiety may be another feeling that is felt when we are uncertain, but we all tend to become reactionary as well during these periods of time.

During her first press conference as Fed chairwoman, Janet Yellen mentioned the Fed’s intention to raise rates sooner than many investors believed. Talk about creating a cloud of uncertainty, Yellen did this in just a couple of sentences.

The initial reaction was not a good one and this can be somewhat attributed to the uncertainty that Yellen brought with that one comment.

Investors know that rates are going to have to rise again and the punch bowl will have to be removed. Having to continue to guess when that will be will cause even more uncertainty. Investors were already guessing when it was, now that Yellen has mentioned it again, investors worry that their initial guesses are now way off.

The reactionary moves will become even more prevalent when data comes out that may prompt the Fed to act sooner. This has already begun but could become even more of an issue as the months wear on.

The Fed has wanted to be more of an open book as the years have gone by. There is not a doubt that this (along with the speed of receiving information) has caused more volatility in the markets.

So, as investors, we have to accept this volatility. And rather than being reactionary, we should look to be proactive with portfolios. I have constantly said this, but preparing portfolios to meet goals and objectives from day one will help limit the desire to be reactionary on days like last Wednesday.

The two main goals that investors will likely have should not be impacted by short term volatility. The first goal of long term growth should not be bothered by short term volatility because their strategy is not impacted by the day to day, rather by the year to year. Income investors should not have to worry about the day to day fluctuations because the income being generated should not be affected by short term volatility.

Volatility is a short term effect of uncertainty, investing success though is an outcome of a long term vision utilizing diversification.

(All data used within The Capital Course was provided by Ned Davis Research)

The Ticket Price Taper

Who doesn’t love to see their favorite teams play in the biggest games for the respective sports? Whether it’s the Super Bowl, World Series, BCS Championship or the Final Four, as sports fans we always dream to watch our teams in these games. However, ticket prices tend to be a deterrent for us to be able to attend such events. The life cycle of a typical ‘hot’ ticket seems to go something like this. Early on in the season those willing to take a risk on their team can likely find one at a very reasonable level, relatively. However, as the games are played and indications point to who will actually be playing, ticket prices begin to creep up. On the announcement, or as it becomes official as to who is going to be playing, ticket prices seem to have their greatest spike.

After the original spike in ticket prices, we tend to see a leveling out. The market finds equilibrium and that tends to be the prices for all the days and weeks leading up to the big game. On game day prices may see a little bit of a bump depending on any news (or lack of) that comes out.

On game day prices begin to retreat as game time occurs and after tip off/ kick off, ticket prices become noticeably more affordable. Every sports fan knows this… if you want a cheap ticket wait until after the game starts. It’s simple as to why this trend occurs. Those holding the tickets become more worried about being left with them and must lower the price to entice buyers. The tide has changed from favoring scalper to now favoring the fan.

The life cycle of a ‘hot’ ticket is somewhat similar to the recent life cycle of rates and the reaction we have seen due to possible tapering. The announcement of possible tapering came on May 22nd, and rates reacted as ticket prices would have to the announcement of who will be playing in the championship game.

Rates rose from the mid 1% levels all the way to nearly 3%. The rise was actually 83%, from the beginning of May to the recent peak in rates. This would be like a face value championship ticket at $90 going up to $165… that’s realistic.

Nevertheless after the initial rise, we begin to find equilibrium for yields… settling in around 2.70-2.80%. As news comes out smaller shocks occur, but nothing like that original spike that we saw when we became aware of the taper.

Now, the longer term impact of a slowing of easing by the Fed and then ultimately monetary tightening (not in the near future) will be for rates to rise, but when the tapering game begins, we may actually see rates act similar to ticket prices.

It is a typical buy on the rumor sell on the news situation with this taper talk. Rates spiked originally, found equilibrium and the majority of the original impact has likely been built into rates based on the economic growth that we are currently seeing.

Another 83% spike in the span of 4 months is likely not going to occur, thus it makes sense for us to allow the taper game to begin and see what happens to ticket prices. It may actually prove to be more beneficial for us, just as waiting for kick off tends to be beneficial for those looking for affordable tickets to the big game.