In an opinion piece for Bloomberg, former NY Fed Chair Bill Dudley shared his thoughts on why there is likely to be more weakness in Treasuries despite increasing indications that inflation is bending lower. 

While longer-term yields have declined as a result, they are starting to creep higher as the economy continues to show momentum with some signs of an acceleration. Hopes that the Fed’s hiking cycle was over seem premature as Fed funds future markets now show hikes at the next two meetings.

Even if the Fed is close to the end, a robust economy means that rates will likely stay elevated at these levels for a prolonged period of time. Further, Dudley sees structurally large deficits, baby boomers spending down retirement accounts, and capital expenditures in renewables and reshoring supply chains as reasons that inflation is likely to linger above the Fed’s 2% target. 

Higher inflation will also erode returns on longer-term Treasuries, leading to higher yields. This has the potential to cause stress to the financial system as we saw with the regional banking crisis especially as Treasuries make up the capital base of so many institutions. However, Dudley sees one silver lining as it could force politicians to address the country’s weakening fiscal situation.

Finsum: Former NY Fed Chair Bill Dudley doesn’t share the market’s optimism that the worst of the inflation surge is over. He sees structurally higher inflation as a headwind for Treasuries. 

In a piece for Vettafi’s ETFTrends, James Comtois covers how direct indexing can improve portfolios through increased diversification while also leading to savings on capital gains taxes. The strategy achieves both objectives by helping portfolios from becoming overly concentrated.

Typically, no stock should account for more than 10% of a portfolio due to the risk of a significant decline in price or a bankruptcy filing. Portfolios can become overly concentrated due to a client receiving stock options, early investments in a company, or large holdings of vested stock. 

For clients in these unique situations, the traditional investing strategy would not suffice. Instead, they need a unique solution. Simply selling these positions is not prudent as it could lead to a massive tax bill. 

A better option is direct indexing which lets clients own the actual index holdings in their portfolio. Then, the portfolio can be adjusted to reduce overconcentration. Further, tax losses can be harvested on a regular basis during periods of market volatility. Subsequently, holdings of the overconcentrated position can be sold with the capital gains offset by these harvested losses. 

Finsum: A unique problem for some investors is becoming overconcentrated in one position. Direct indexing offers a solution as it can help reduce the tax bill of selling these positions and lead to more diversification.

Following the abysmal performance of stocks and bonds in 2022, it’s understandable that alternative investments have been gaining strong traction over the past year. Moreso when considering that alternatives delivered better returns while reducing volatility. 

In a CNBC article, Kate Dore discusses survey results from the Financial Planning Association that show nearly 30% of advisors are investing in ‘alternatives’ for their clients. These advisors mentioned diversification, lower portfolio risk, and higher returns as major factors in this decision. 

In contrast, 30% of advisors are aware of alternative investments but are electing to not put client funds in these vehicles. Many of these advisors cited higher fees and expenses, lower liquidity, higher borrowing costs, and a lack of transparency as major concerns. Another concern is that clients are not able to easily access these funds in case of an emergency.

There’s a wide disparity in the asset class as it includes a variety of categories like hedge funds, private equity, real estate, commodities, and structured products. Therefore, even more due diligence is required given lower levels of regulation and oversight. 

Finsum: Alternative investments are increasingly being embraced by advisors, especially after their strong performance in 2022. However, some continue to eschew the category due to a variety of concerns.

In an article for ThinkAdvisor, John Manganaro shares some concerning research that shows most advisors are not preparing for succession planning and that it poses a significant threat to the industry. It’s also commonly cited as a risk by the leaders of various advisories as there are forecasts of a massive wave of retirements by advisors over the next decade.

Many are incorrectly assuming that they will be able to gracefully exit the business and hand over their clients to the next generation. Yet, this is easier said than done since it assumes that the incoming advisor will have the talent and ability to serve clients and help them reach their financial goals. 

There are additional challenges such as many clients may not be comfortable with younger or newer advisors and elect to go elsewhere. Often, relationships between the retiring advisor and the newer one can fray over questions about leadership, compensation, and the financial structure of the new arrangement. 

It’s ironic because advisors intuitively believe in long-term planning to help their clients reach their goals. Yet, many are not doing the same for their practices.

Finsum: Financial advisors need to embrace long-term planning to ensure a successful exit with the same diligence that they help their clients build a plan to reach their financial goals.

Volatility’s not your game? You’re sure now?

Well then, to tamp down volatility in a portfolio – or generate steady income -- fixed income assets are popular alternatives to dividend stocks, according to money-usnews.com. And the assets pay out a defined stream of income.

It typically assumes the form of bonds, which, essentially, are IOUs investors can reach into their wallet for from a number of sources, like, for example, governments and corporations.

That said, bond investing isn’t as easy as one-two-….you get the ides. Instead, since individual bonds are traded over the counter and mucho calculation is required to price correctly, it can be complex.

"Given the higher risks and costs associated with portfolios of individual bonds, and the time they take to manage, most investors are better served by low-cost mutual funds and exchange-traded funds, or ETFs," said Chris Tidmore, senior manager at Vanguard's Investment Advisory Research Center in Wayne, Pennsylvania. "This is particularly true in the case of municipal and corporate bonds, which are less liquid and harder to purchase than Treasury bonds."

Meantime, this for U.S. investors in exchange traded funds: you might want to mull over taking the splash into medium-term fixed income ETFs. according to marketwatch.com. Why, you might ask? They could not only dispense “attractive carry,” they also could translate into a “buffer” against the volatile returns in the U.S. equity market. That’s in light of the fact that the Fed’s path toward interest rate hiking’s immersed in a lack of clarity, Gargi Chaudhuri, BlackRock’s head of iShares investment strategy for the Americas, said.