George W. Karpus, The Daily Record Newswire
At the end of 2013, an overwhelming proportion of investment professionals were calling for poor bond market performance in 2014. If you speculated and voided your portfolio of long-term bonds in favor of equities, you would have missed the 10th best quarterly performance in long U.S. Treasurys since 1994.
As a matter of fact, long-term U.S. Treasurys have gone up by nearly 8 percent and long-term municipals have gone up by about 6 percent so far this year. In contrast, domestic and European stocks were flat to up 1 percent for the quarter. Few predicted the tremendous decline in interest rates, which has driven the outstanding performance of long bonds early this year.
In my Jan. 2 article “How to get 7 percent tax-free income from your portfolio,” I stated: “A more realistic scenario is to see a 9 percent after-tax total return, which should be greater than the expected return in the stock market with only half of the statistical risk.” As of the end of the first quarter, our tax-sensitive portfolios containing 60 percent long-term closed-end municipal bond funds and 40 percent short-term municipal term preferred securities has already produced half of this year’s expected return.
The point I want to make is that investors should be skeptical when faced with “experts” who think they can predict market moves. To prove this point, investors should take a look at the events that occurred during the best performing quarter for long Treasurys in the past 20 years — the third quarter of 2011. In a quarter where the Federal Reserve terminated its second round of quantitative easing and when Standard & Poor’s downgraded the credit rating of the U.S., the long end of the U.S. Treasury market rallied by returning over 29 percent!
While most investors would never have guessed that these events would result in the best performing long Treasury returns, the impressive returns in the third quarter of 2011 illustrate the need for investors to invest based on risk/return characteristics and portfolio fit rather than on speculation. Speculators try to guess markets. Investors, on the other hand, stay the course and rebalance into market weakness.
If you under allocated to long-term bonds for 20 percent of your assets, you are most likely behind by 1.3 percent through the first quarter of 2014. Discipline and staying the course is why we have been one of the best performing investment managers in the nation over longer time periods.
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George W. Karpus is chief investment strategist and chairman of the board of Karpus Investment Management, an independent, registered investment advisor that manages assets for individuals, corporations and trustees. Offices are located at 183 Sully’s Trail, Pittsford, N.Y. 14534; phone (585) 586-4680.
