The Fix Is Not In: Why You Should Avoid These Investments

It happens each year. Don't fall for it. What am I talking about? The plethora of articles and posts telling investors where to find the best income plays for the coming year. The Federal Reserve's destruction of the auction market in setting interest rates has made income on saving into a very bad joke. Retirees plans to live off interest income from risk-free investments like bank CDs, Treasury paper and even non-junk corporate bonds have been dashed on the rocks since shortly after the 2008-2009 financial crisis. People should have realized by now that risk-free returns are now virtually guaranteed to lock in substantial losses of inflation adjusted buying power. That didn't stop publications such as Barron's from running articles about where to find the best of some very poor choices. Here are the headlines for pieces: The Best Yield Plays for 2022 and The Best Bond Funds for When the Fed Raises Interest Rates - both published by Barron's at the start of this month. How did that publication's 2021 picks from the same topic pan out? At first glance, the equally weighted portfolio didn't look so horrible, with an 11.03% average return. After further study, though, many of the included picks were equity-based. Pipeline master limited partnerships, U.S. dividend stock funds, electric utility companies, real estate investment trusts, and telecom stocks were far from riskless. Ditto for convertibles and junk bonds, which act much like equities. If you were going to accept risk assets why not simply buy them instead of that rogues' gallery of stocks in disguise? Simply owning exchange-traded funds or mutual funds of all three major indexes would have provided much higher total returns in 2021 as detailed below. The year 2022 is likely to be even worse for fixed income than last year. The last time officially recognized inflation was running this high was more than 40 years ago. Back then, buyers of 30-year Treasuries could pocket close to 14% coupon rates as compensation. As of last week, a sub-2% coupon meant accepting severely negative losses of true buying power over a full three decades. There has rarely been a worse starting point for people to be buying bonds. Barron's second article, pointing out three bond funds, which survived a short period of modestly rising rates, is probably just a waste of ink. There are hundreds of bond funds and there will always be a few that outperform at any given period of time. As noted earlier high-yield bonds (a.k.a. junk bonds) often act much like equities. None of the three funds did well in 2021. Pimco's actually delivered a net loss. The last rate hike cycle doesn't look like much when viewed in a broader context. Stocks are expected to do badly in rising rate scenarios. Was that the case from Jan. 1, 2016 through July 1, 2019? Simply owning the S&P 500 exchange-traded fund over that span would have almost doubled the 9.4% average return of the three highlighted funds. Investing publications should be warning people to avoid fixed income in particular, and traditional income equity sectors, rather than trying to coax a few extra basis points out of sub-par choices. The following data say all there is about what long-term investors should be doing with money unlikely to be spent within the next year or two. Stop buying inferior fixed-income investments. Protect your wealth by going with stocks that can overcome inflation via pricing power.

The Fix Is Not In: Why You Should Avoid These Investments

Every year you see investment publications pushing fixed-income products. Here's the risk with those.

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