American retirees should not be tempted to pile into Treasury bonds too strongly in response to the Cyprus banking crisis, warns the boss of the world’s largest financial advisory firm.
The comments from the chief executive of the deVere Group, Nigel Green, come after US bond prices jumped and yields fell to their lowest level in more than three weeks on Wednesday, as fears mount over the potential fallout of the Cypriot financial situation and the highly controversial attempts to deal with it.
Mr Green says: “With every external ‘shock’, such as the current Cyprus crisis, there’s always a temptation to flock into assets classes, such as US Treasury bonds, which are perceived as ‘safe-havens’.
“But, as demand for bonds increases – and it has been steadily increasing due to the turbulent economic times – their prices go up and their returns plummet, meaning that bonds are not as ‘safe’ as they are often perceived to be as they’re not producing a satisfactory income stream.”
This scenario is, says Mr Green, likely to adversely affect retirees, in particular.
“Traditionally, investors have been advised to increase their exposure to lower-risk assets as they get older and, as such, many retirees have opted for the perceived safety and reliability of bonds.
“But the world has changed since the financial crash of 2008, and the ongoing low rates – currently hovering around the 2 percent mark – which are a result of the global economic volatility, will hit retirees hardest. This is because they are the ones whose portfolios are likely to be more greatly exposed to bonds; retirees, generally, live off fixed incomes; and because they perhaps might not have the time to make up any losses they might suffer.
“As it’s currently expected that bonds will not generate the returns needed to fund the retirement we all aspire to enjoy, and because Americans are living longer – meaning retirement savings need to go further – there’s a strong case to suggest that retirees need to reduce their exposure to bonds and consider higher-risk, better-performing asset classes.
“There are efficient, bona fide alternatives to under-performing bonds. I would urge retirees to seek advice from their financial adviser about diversifying their portfolios if they are ‘bond-heavy’ – especially as the eurozone saga, amongst other considerations, looks set to rumble on and on.”