Let’s test your memory. What  were you doing 22 years ago? Were you learning that  Bruce Willis’s character was deceased in “The Sixth Sense”? Were you watching “Friends” with friends while wearing your favorite acid-washed denim jeans? Did you secretly listen to boy bands while publicly listening to Prince’s “1999” leading up to the millennium? Or were you growing excited about the ever-changing internet while worrying about the Y2K bug that would supposedly destroy the modern world as we knew it? Of course, many breathed a sigh of relief as no significant issues were reported as the clocks turned from 11:59 pm on 12/31/99 to 12:00 am on 1/1/2000. However, trouble was brewing elsewhere.

Back in the 1990s, the internet was bubbling with promise. Digital businesses on the web were going to revolutionize how we worked, played, and lived our lives. College IT graduates moved to California to develop start-up tech companies in droves. Millions of dollars were being poured  into these businesses while they s poured dollars into digital advertising to raise the number of views on their websites by consumers. People started buying Initial Public Offerings (IPOs), and the dot-com bubble continued to expand. The Nasdaq quintupled from 1995 to 2000. People were selling the stocks they had that were not related to the internet and purchasing internet-based shares. And then, the bubble burst, resulting in almost a 77% drop to the Nasdaq, with many dot-com stocks suddenly going bust. (1) Are the lessons that we learned from those days relevant now? Are their options to consider to help protect yourself?

If you favor individual bonds or notes, one that could play a role in a person’s portfolio is called a “fixed to float” note. This is, essentially,  a note where you give a “loan” to an entity. But it’s not a corporate bond. (The main difference between a bond and a note is that bonds are considered securities but notes aren’t.) Many of these notes are being issued by some of the largest banks in the country. An example of how a fixed-to-float note might work is like this: You go out and buy a note that has a 5-year fixed rate, and you get 4% interest. For simplicity’s sake, I’m going to use general numbers here, while in reality, the numbers will depend on the day that you purchase the fixed-to-float note because they are contingent on marketplace.

If we have a fixed-to-float note with  a five-year note at 4%, that means for five years, you will receive 4%. At the end of five years, the rate begins to float. That rate, for example, could be 3% above the current five-year treasury. So, if the five-year treasury moved to 4% over the next five years, that would mean you would be getting a 7% yield on that fixed-to-float note in the sixth year. When the banks issue these notes, they can also call that note at the end of that time frame. At the end of those five years, if the bank decides they don’t want to pay 7%, they may call that note back. Worst case scenario, you earned your 4% plus your original investment for five years. Please note that I’m oversimplifying, but there are opportunities like what I described that people could consider adding to their portfolio. There aren’t mutual funds or ETFs that will act like this, so it’s essential to be strategic, and to find  a financial advisor who understands how these types of notes work. Admittedly, there are other types of fixed-income instruments that can work, as well. But those may provide a buffer to a rising interest-rate environment where we would typically hold bonds.

What about the liquidity of those notes? The liquidity will be the same as the bond. You can sell it if you have another buyer, but there’s no guarantee what that buyer will offer you, and it will depend on what that is. But, if you hold that fixed-to-float note over the period agreed upon at the beginning, you’re going to get back your original investment at the end of that.

When it comes to the bond market, one of the things that people will be paying attention to are Treasury Inflation-Protected Securities (TIPS). In a rising interest rate environment, they can be a solid investment. But remember, inside of TIPS, you’ll get an interest rate that moves with the Federal Reserve. That’s why it seems attractive when  interest rates are going up. But it’s important to remember the negative impact of increasing interest rates. , As they increase, the dollar value of a bond goes down. But because the TIPS can reset itself, if six months passes and rates are higher than they initially were , you’ll receive the benefit of that additional income. Over time, that can be a solid investment. However, because the current  market is so volatile, Osiwala Financial Group Advisors recommend keeping  maturity levels short – between 0 and 5 years.  If you look at the longer-term TIPS for 2022, the dollar value of those TIPS is moving similarly with the regular bond market. And while they are down, your zero to five years has remained relatively flat with a yield of over 4%.

This process used to be simple. You could load up on the bond aggregate if we were in a higher interest rate environment like we were at the beginning of the dot com bubble. As interest rates fell, not only did investors receive the yield but they also received the price appreciation. During that period, there were years where bonds delivered 14-16% overall returns. But that can’t happen in today’s environment. It’s statistically impossible. However, with the right advice, it may be possible to benefit in the current financial environment. 

Do you want to learn about possible opportunities your retirement portfolio may have during these volatile times? Click HERE to schedule what we are calling an “ask-anything session” with an Osiwala Financial Group Advisor. It takes about 20 minutes, can be done by phone, in-office, or virtually, and is entirely free.

  1. https://www.investopedia.com/terms/d/dotcom-bubble.asp