DANGERS OF BOND SUBSTITUTES
In the past, we have lamented that the low-interest-rate environment created by the federal government (after the 2008 financial crisis) massively punished the financially prudent Americans by destroying their ability to achieve returns on low-risk bonds. Many of these prudent investors were retirees born near or around the time of the great depression. As a result, given their upbringing and the events of 2008, these prudent investors were averse to stocks and in search of an alternative to the stock market for decent returns now that their low-risk bond opportunities had disappeared.
The above scenario gave rise to the use of a number of financial products and strategy loosely referred to as “bond substitutes”. These are financial products that provide income like bonds and are purportedly low risk. This would include stocks with high dividends (including utility and preferred stocks), income-producing real estate, master limited partnerships (a/k/a MLPs) and other oil and gas investments, alternative investments, annuities, option strategies, and other financial products and strategies.
After a decade of this low-interest-rate environment, we strongly urge you to take a hard look at your investments as a whole (brokerage accounts, retirement accounts, real estate, collectibles, etc.), and see if you have drifted so far away from bonds that there are fundamental allocation, diversification, leverage, liquidity, and other foundational problems with your overall financial picture. In other words, not only may the “bond substitutes” you own have more significant or different risks than low-risk bonds, but the way they interact with the rest of your portfolio may be far different than how a bond component would interact with the rest of your portfolio in a disruption or downturn in the markets.
ABOUT VERNON LITIGATION
Vernon Litigation Group is a law firm with offices in Naples and Atlanta that represents clients in courtroom litigation, arbitration, including FINRA arbitration, and mediation throughout the United States. Our lawyers are focused on financial litigation and have significant experience with financial litigation involving stocks, bonds, real estate, trusts, estates, insurance, cyber, whistleblower, employment, and business and commerce. Please contact us to discuss your rights if you believe you have a legal claim. For more information, visit our website at http://vernonlitigation.com or contact us by phone at (239) 319-4434 or by e-mail at info@vernonlitigation.com to speak with an attorney at Vernon Litigation Group.