Historically, diversifying investments between stocks and bonds has reduced portfolio volatility and more importantly has limited significant losses. In 2022, historically high inflation and significant interest rate increases imposed by the Federal Reserve have caused bond prices to fall dramatically. In short, neither stocks nor bonds have protected against market declines.
Looking forward, the higher interest rates now in place have created some attractive opportunities. First, short-term cash investments can now generate 2% returns. Over the past decade, cash had a 0% return. For clients who need to hold some excess cash for a period of time, we are now able to generate positive returns on the cash.
Looking at longer-term fixed income investments, the opportunities are more abundant than they have been in the recent past. With high current interest rates, some bond investments will be generating 3% to 5% income returns which can be supplemented by principal returns as interest rates subside from their current levels. Overall, the bond portion of investment portfolios should be expected to deliver better relative returns than it has in recent years.
While all investors have suffered market declines in 2022, the light at the end of the tunnel is higher yields. This means better opportunities exist for cash and fixed income investments than have been available for many years.