When to Crap your Pants

I apologise for the crude subject line but hey that is exactly the instruction my mother gave me as I was providing her advice on her investment portfolio. What I am about to describe is not unique to my family this is a problem the retired world is facing and some countries have it worse than others on a relative basis; the theme remains consistent.

My mother needs $=X each month to cover her living expenses, don’t worry mom I won’t say how much 🙂 . Something else to consider is my mother is incredibly risk averse, that is despite her roulette addiction so capital preservation is a major theme in her portfolio.

My brother in law and myself are her trusted advisors and we decided to have a small equity allocation based on her needs for income and capital protection so we went 40% equities, 60% fixed income and cash. Yes of course we could have done better had we more exposure to equities and yes with new highs in the Dow yes we left some on the table but you can also see that the Aussie market has not yet reached new highs so we did ok. Moving along……dowaord

So we have a heavy weighting in fixed income / bonds 58.5% with just 1.5% in cash. With all this QE talk in Europe it suddenly dawned on me perhaps my mothers portfolio is not as safe as we perhaps thought. Take a look at the Aussie 10yr bonds the yield is at an all time historic low, which means the price inversely (that’s how bonds work) is at all time highs.

australia-government-bond-yield

We have just witnessed the impossible a major world currency moved 16% in one day actually a little more during the day that is pretty damn scary. The point I made to my mom is that perhaps its time to sacrifice a little on the monthly income and move more of her funds from fixed income into cash. Sometimes one just has to bite the bullet and be extra careful.

The crazy thing is in some countries keeping your money in cash means you are paying the bank to store your money. Many people like to say that bonds and equities are not correlated but that is simply not true. There are periods that they are like now and others that they aren’t.

So while trying to avoid what we thought/think may be an equity bubble we have climbed right onto what is probably the biggest bubble of them all the Bond Bubble. Heaven helps us when this bubble bursts as we are likely do more than crap our pants.

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