United Methodist Foundation of Indiana

Time to Review Your Asset Allocation December 16, 2010

Is the Bond Bubble Finished?

If you have been following my earlier postings, you know that I do a lot of investment reading. I have just finished reading two articles with very timely suggestions. For several months  I have been reading that we are nearing a time when interest rates will begin to increase. In earlier articles I have suggested that church investors watch for signs of increasing interest rates as that will be an indicator of likely falling bond prices. Those concerns have intensified in recent weeks. One of the recent articles points out that interest rates have already started to rise and bond prices have started to fall. Five-year U.S. Treasury bond interest has nearly doubled to 1.9%. The rate on 10-year bonds has gone from 2.4% to 3.2%. 30-year bonds are now paying 4.4%, nearly a full percentage point more than just a few months ago.

We have just come through a time of outstanding bond returns. It appears that is about to change. Bond performance going forward is likely to be much lower. In fact, if interest rates rise rapidly, bonds may reflect losses in the future.

What Can We Expect from Stocks?

The second article indicates that in spite of a sluggish economy, stock prices could be up 9% to 13% in the next year. The author notes that the market is looking past the immediate situation and is counting on continued growth. Many economists are expecting corporate earnings to continuing to grow as the economy improves. As earnings grow, even if the price earnings ratio for stocks holds steady, the stock market will produce good returns. Of course, increased corporate earnings often also results in higher price earnings ratio and even higher stock prices.

Increased corporate earnings would be the norm as we begin to come out of difficult times. During extended times of prosperity corporations tend to build employees and overhead. During difficult economic times, companies are saddled with excess employees and overhead. As the difficulties continue, they lay off employees and reduce overhead. The result is, those companies that survive will be very lean and ready to succeed as the economy recovers. In the early stages of a recovery, corporations will be slow to add employees or overhead. As sales increase, companies will be much more profitable because they have reduced staff and overhead.

Many foreign economies are growing much stronger than the US economy. The fastest growing economies are in the “emerging markets” of the world. This would include countries in the Pacific rim, Latin America and India. In order to benefit from anticipated growth overseas, it is important to have a strong international focus in your portfolio. In the past, many consultants recommended 20% of equities be in international securities. Today, many consultants are recommending 30 to 40% of equities be invested internationally.

Need Help?

If your church would like assistance in developing an investment strategy, reviewing your current investments, or exploring other investment options, we would be happy consult with your decision makers to assist. Our Foundation provides these services free of charge to United Methodist churches throughout Indiana. Just call me or send me an e mail.

Happy investing!

Royce

Royce L. Ruckman, CPA, AEP

Director of Investment Services

United Methodist Foundation of Indiana, Inc.

1001 N. Western Ave., Suite D, Marion, IN 46952

toll free 866-669-2327,  local 765-664-2327,

cell 765-661-6804

e mail rruckman@niumf.org

Visit our web site at http://www.niumf.org