Your IFA was never trained to deal with the world as we know it in 2019.

Chances are, as you approach retirement age he will be gradually moving you out of ‘risky’ equities into ‘safe’ bonds. Some even give this strategy a fancy name like Lifetime Asset Allocation.

The problem is, the markets have moved on and their thinking hasn’t.

To be fair, logic is on their side. When you buy shares your main focus has been on capital growth, with the expectation that you will be rewarded for accepting the inevitable risks that can impact any trading organisation. Dividends are seen as a nice bonus, but most of us are hoping to find the next Amazon or Google and experience the Holy Grail of a Ten Bagger – a share that goes up 1000% between us buying low and selling high.

Boring old bonds, on the other hand, are issued by governments and large corporations with the sole purpose of providing predictable, albeit rather low, levels of long term income. That’s why the older you are, the more you should lean to this asset class to put food on the table in your dotage rather than those racy stocks and shares that are too volatile for your fragile blood pressure.

Somewhere after 2008, as trillions of dollars of QE was dumped into the markets in an unsuccessful attempt to stimulate growth and inflation, that worldview became obsolete.

Depending on who’s numbers you believe, we now have between $12 trillion and $17 trillion of government bonds offering a negative yield. A guaranteed loss if you hold them to maturity. But, of course, people have no intention of doing so. They are relying on Bigger Fool theory – they become short term traders of bonds, waiting to sell them on to the next guy for a capital gain in price. Income? Schmincome…

For an example of the success of this approach, look at the Bloomberg Barclays Global Aggregate bond index which is up 8% in the last year despite only yielding 1.37%. And there’s no sign of the madness ending any time soon. As his parting gift to the ECB, Mario Draghi has kicked off another round of central bank bond buying which will only pump more froth into this bond bubble.

So where are investors turning to for income? Why, to the stock markets of course. The FTSE is now yielding an average dividend of above 4%, with many household name brands offering 5% or more. It’s the same thing in America, where the S&P offers a 2.1% return, higher than all bar 30 year government bonds.

In a world that lives from one quarter’s earnings report to the next, you need to take an extremely long view to see the cycles in which bond and equity yields reverse. If you were active in the markets between 1800 and 1950, you’d see shares paying higher dividends than bond coupons to reflect the higher risk, higher return demands of those pioneer investors. Things changed as Elvis and the Everly Brothers topped the charts in the late 1950s, when the 10 year US Treasury Bond started to offer a better yield than the S&P 500. Written off as a temporary aberration by financial advisers at the time, that move set the trend for the next 50 years. Until, that is, unprecedented market manipulation would take us back to the future.

Your IFA was born in the late 1950s or early 1960s and has spent his whole career in the ‘safe bonds for yield, risky equities for growth’ world. Just one more reason why you need to take personal control of your finances and avoid the mistake I made of abdicating my wealth management to the ‘professionals’.

Of course, like all trends, this one could reverse at any moment. Almost every indicator is pointing to a recession in 2020. It’s anyone’s guess whether over-priced bonds or risky shares will take the biggest hit.

As someone I know well used to say – ‘be careful out there…’

Until next time

Graham