Adapting and Investing – Part I

Blog post #446

To be successful at almost anything, you need to be able to adapt. This applies to individuals, families, companies and countries.

In the past months, we have all been forced to adapt and change. Going forward, we will all need to continue to adapt, innovate and change.

Though there has been tremendous loss of life, if you step back with a broader view, individuals and societies around the world have adapted incredibly quickly, in various ways and with differing levels of success, to the Covid pandemic.

If I had told you on February 1st that most of us would be working from home (and staying home!) during March, April, May and even into the summer, you would have not thought that would be possible or could work. Now, many companies are realizing that a certain percentage of their employees can successfully work remotely, and they are innovating to meet the challenges of the Covid era.

Our firm adapting

We hope working remotely is not a permanent requirement, but a choice that people and companies can make. For many years, we have had a team member, Michelle Graham, who has worked for us remotely very successfully, after she started with us an in-office employee.

As a firm, we had steps in place, which had been tested for many years so we would be prepared to work remotely, if needed. Fortunately, we have been able to handle this difficult situation very well, from an operational standpoint. We have received phone calls, done Zoom and phone meetings, placed stock and bond trades and managed your portfolios all from remote locations. With no problems or glitches.

Our firm: core principles

We continue to believe in many of the core investment principles we adopted nearly two decades ago, but we have also adapted and made changes throughout the years, as well as in response to this crisis.

In terms of fixed income investments, we have adapted and reacted quickly to change.

  • Our role is to purchase the optimal type of fixed income investments that we feel would be safe (you should be repaid the principal upon maturity), pay the best interest rate for a given maturity and we monitor the security while it is in your portfolio.

Covid and Fixed Income Impact

When the Covid crisis severely affected the credit markets in mid-March, we had a conference call with fixed income executives of our primary mutual fund company. As a result of that call, subsequent analysis and decisions, we sold many individual corporate bonds of companies that were previously considered safe, but in this new world, appeared much riskier. We did not need to act in a panic. We did not need to sell due to a need for cash or because we, or our clients, had used margin or leverage. We waited until prices improved. Over a period of weeks, we sold bonds that were held which the Covid crisis has impacted the most, mostly in the retail, hotel and energy sectors.

While we still believe in buying and holding individual investment grade corporate bonds, we reacted with thoughtfulness and conservatism. We decided to sell the bonds of companies whose financial situation appeared to be the most impacted by this crisis, especially where there was no real visibility of how or when these companies would recover. We hope these companies do recover. But given the changed circumstances, we thought our clients should be holding better quality fixed income securities. We adapted quickly and decisively, for you, our clients.

Municipal bonds and bond funds – other changes

Usually, municipal bonds are only purchased for those in the highest tax brackets (incomes above $520,000 or $625,000, single or married), and only for their taxable accounts. Municipal bonds are debt issuances of state and local municipalities, as well as colleges, hospitals, water and sewer systems, and other projects. The interest is not taxable by the US Government, which enables the issuers to generally pay lower interest rates than corporate bonds or bank certificates of deposits (CDs).

It is our responsibility to monitor and adapt to what the financial markets provide. Recently, in a major change, some high-grade municipal bonds are paying higher interest rates than CDs and investment grade corporate bonds.

  • If this anomaly continues, it is possible that we will be purchasing municipal bonds for clients in all tax brackets, not just for those in top tax bracket, which is something that we have rarely done in the past.
  • This is a decision that we will make based on what the financial markets are offering at a given date, which constantly changes. It is our role as your financial advisor to adapt to the financial markets and do what is in your best financial interest.

While we have generally used mostly individual bonds and CDs for larger clients in the past, another way that we are adapting to the new, Covid world is likely to be a greater use of bond mutual funds within your fixed income portfolio. We have always been strong believers in diversification in both fixed income and stocks….and we continue to believe this. Due to the greater credit risk that now exists in the economy, we feel that adding bond mutual funds, in addition to other types of fixed income investments, will provide clients with greater security and more diversification.

  • If you add to your portfolio or have other fixed income investments that mature, if we invest those funds into an existing bond fund, that may provide a greater return than if we buy a new individual fixed income security.

These are just a few of the ways that we are adapting and evolving, as we always have, to changes in the world and changes in the financial markets.

We know that the world has changed dramatically.  We are committed to adapting, which means continually evaluating our business, principles, investments and practices.  When needed or when it makes sense, we will adapt and change, if we feel that would be in your best financial interest.

As always, we are here for you, and family members or friends who could use our guidance and assistance during the crisis.

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