Investment Strategy For The Conservative Investor

When an investor remains in a long-term hold position, there is little to write about. It does not matter if the Federal Reserve is tightening monetary policy due to inflation, the market has entered into bear territory, and a recession is forecast. A war in Europe and energy security concerns dominate conversations. Still, not enough has changed to alter my long-term strategy to invest conservatively and use dividend and interest income to supplement my pension and social security income. After a year of silence, I thought it would be good to review the outcomes of my conservative portfolio.

In the beginning of 2022, I would not have anticipated a sigh of relief had I been told that my 2022 investment performance would hover near -3.25%. And yet, as of Dec. 27, 2022, the major indexes have performed as follows: the S&P -19.66%, the DOW -8.43%, the Nasdaq -34.77%, and the Bloomberg U.S. Agg Total Return Value Bond Index -12.97%. In comparison, I feel justified in my moderate sense of satisfaction. Admittedly, in the previous few years, the conservative approach returned respectable results, though not in keeping with the same indexes quoted above.

I have maintained a portfolio allocation of 60% equity/40% bonds. The allocation varied by a few percentage points during the year solely because of market volatility. The equity portion of my portfolio was split between a variety of individual stocks and four defensive funds. My diversified equity holdings were the best part of my portfolio. They included Merck (MRK) +46.29%, Kellogg (K) +12.81%, IBM (IBM) +6.55%. and Pinnacle West Capital Corp (PNW) +10.09%. My biggest mistake was not selling the Warner Bros. Discover (WBD) (down 60.79%) shares I received as part of AT&T’s (T) spinoff of Warner Brothers.

Of the equity funds, the best performer was Fidelity Select Utilities Portfolio (FSUTX) +6.37%, followed by Fidelity Select Consumer Staples (FDFAX) +0.45%. My worst performer was Fidelity Select Telecommunications (FSTCX) -17.29%. The latter’s large investments in and the poor performance of AT&T and Verizon (VZ) heavily impacted the fund’s return. Both companies continue to pay excellent dividends while they address their heavy debt loads. Patience is required in these companies, which I hold individually and within FSTCX.

Fixed income holdings were painful. Though fund yields rose along with interest rates, underlying bonds lost significant value. The key was managing duration, as demonstrated by the Fidelity Floating Rate High Income Fund (FFRHX) -.30% with a current 30-day yield of 8.05%. My next best performer was Fidelity Short Duration High Income (FSAHX) -5.56 with a 30-day yield of 6.80%. Given a long-term timeline, my fixed income fund investments also include Fidelity High Income (SPHIX), Fidelity Strategic Income (FADMX) and Fidelity Capital and Income (FAGIX). My final fund holding, Fidelity Global High Income (FGHNX), was down 10.93% with a 30-day yield of 7.43% – it had the additional headwind of a strong dollar. Earlier this month, I sold shares in both FGHNX and SPHIX to harvest long-term capital losses in order to avoid a higher Medicare income-related monthly adjustment premium. I have every intention of repurchasing those shares after the required 30-day wait period mandated by the Internal Revenue Service.

For the last two years, I have invested the maximum allowable $10,000 in I-Bonds, currently yielding 6.48%. As long as the interest rates remain competitive, I will add to this position.

I have learned, through a bad experience, not to invest in individual lower grade bonds (better to hand that responsibility to professional bond fund managers). I do invest the cash portion of my portfolio in FDIC insured Certificates of Deposits and Federal Agency Bonds. Though my chosen durations range between two and 10 years, the majority of my investments have a five-year duration, preferably non-callable. In the past six months, I have obtained yields between 3.4% and 5%. Though, on paper, my individual bonds have lost value, no loss will be experienced at maturity.

Monetary policy of recent history has distorted interest rate expectations on Main Street. For a personal perspective, I reviewed my home mortgages. In 1998 my home mortgage was 6.625%. I can currently obtain a 30-year mortgage for 6.375%. Per Freddie Mac, historical 30-year (1971-2022) mortgage rates averaged 7.76%. The high was 16.6% in 1981 and the low 2.96% in 2021. From 2000 to 2010, mortgage rates steadily dropped from 8.05% to 4.96%. The downward trend continued until 2022. What the economy is experiencing is a return to normal. It is a reality that has escaped younger generations, but that is very much in my muscle memory.

In terms of bond values, what goes down because of tightening monetary policy has a strong chance of going up after the Federal Reserve pivots and a stabilized rate environment is reached. I believe the Federal Reserve when it projects a terminal rate near 5%. That will require up to three more .25% increases in the first half of 2023.

As a result, fixed income will continue to experience losses. It might be prudent to wait another 30 to 60 days before reinvesting in a fund or ETF. I will remain with my strategy, not changing my positions, anticipating better income flows as well as a return of value, knowing that the latter may take 24 to 36 months to be realized.

Every investor should review their portfolio’s performance, take stock of their financial security and goals, and monitor the economic environment and its impact on them. For me, I am satisfied to stay the course. At age 64, I have achieved financial security and a comfortable lifestyle. As I have written in the past, I am not seeking to accumulate more wealth. My goal is to protect my hard-earned wealth, supplementing it with a steady flow of income. I achieved my goal in 2022. I expect 2023 to be better.