Investment Strategies

On Friday, investors cycled out of long corporate bonds, selling a net $93.5 million in long, high-quality corporate bonds, according to the Wall Street Journal.  Instead, they bought a net $130 million in short high-quality corporate bonds and $105 million of intermediate high quality bonds.  Why?  Experts believe the jobs report caused the movement with many investors looking ahead to the Federal Reserve slowing its bond buying program.

It’s most likely, however, that institutional managers are primarily responsible for movement in the bond market, with individual investors lagging behind.  Corporate bonds are owned by about 40 percent of households with over $5 million of net worth, according to research conducted by Spectrem's Millionaire Corner and about 44 percent of these households plan on continuing to invest in bonds throughout 2013.  This bond investment, however, is lower than the over 70 percent of wealthy households that intend on increasing their holdings of equities in 2013.  The average portfolio of a household with $5 million of net worth (not including the value of the primary residence) averages $717,000 of municipal bonds, $302,000 of corporate bonds and over $1.1 million of individual equities.

Approximately the same percentage of investors owned corporate bonds in 2008, but the average value of the portfolios was much higher.  In December of 2008, 42 percent of households with over $5 million of net worth own corporate bonds with an average value of $742,000.  Municipal bond ownership average $1.4 million at that time and equities in the portfolio averaged $1.7 million.  So where have the assets gone?  A significant portion  is still being held in cash deposits and money market accounts.  Another portion has gone to hedge funds and other alternatives as wealthy investors seek to balance return against security.

For individual investors, any change in their bond portfolios will be dependent upon the advice of their financial advisor.  Over 75 percent of wealthy households use an advisor to some extent.  Regardless of whether they are totally or partially dependent on an advisor, it is likely that current decisions regarding bonds may require a little advice and analysis from their professional advisor.  Whether the advisor feels Bernanke will or won’t slow down the quantitative easing will be the critical factor underlying that advisor’s recommendations.

And how do wealthy investors feel?  Millionaire Corner research show that investor sentiment is increasing, but there is still a hefty dose of skepticism regarding whether the recovery is for real.  Most investors believe that the unemployment rate needs to be below 7 percent to validate the recovery, and a sizeable portion of investors are holding out for a 5 percent unemployment rate.  The skepticism may actually be good for the bond market.  The real question, however, is how Chairman Bernanke feels.