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Bond Market

Disciplined Principal Protection

  • 10.13.20
  • Markets & Investing
  • Commentary

Doug Drabik discusses fixed income market conditions and offers insight for bond investors.

The message today is quite simple: Principal Protection. The method to accomplish this is reasonably simple: provide the appropriate asset allocation to individual bonds. The discipline required however, can be extremely challenging.

We all have a desire to win, outwit and outperform the averages. This is America. The land of opportunity, freedom and endless upside. We are conditioned to excel and programmed to believe we can outdo the standard.

These traits are considerable factors which make our nation great. They also are substantial influences swaying diciplined investing off track. We think we can beat the averages. We believe we are smarter than the average investor. We can overcome the market and market rates with our drive and intelligence. A vast majority of people consider themselves above average in some capacity, but by definition, 50% of the population is below average.

Things are great … until they’re not. No one wants to invest their money at 2.00% when another option aims to provide 4.00%. What is particularly tough about disciplined investing right now is that the alternatives are working out. For example, there seems to be no end as to how high the equity markets can go. There hasn’t been a rash of credit defaults. There Is No Alternative (TINA) so money flocks to places with hopes of appreciation. The more it works, the greater the flow.

The problem is that this is terrible rationale to deviate from disciplined asset allocation. Growth assets such as stocks, are an integral part of a portfolio designed to grow. Contrarily, fixed income plays an essential portfolio role of protecting principal. Taking on risk, even if it is temporarily working, can become a devasting endeavor that strikes quickly and may not be stoppable.

When you buy an individual bond and hold it until maturity, you know the exact income, the precise cash flow and the specific day that the face value will be returned to you. There are no deviations to this no matter what interest rates do, no matter how demand or supply changes or no matter what is happening in the political climate. The only 2 events that can change your income, cash flow and date of returned face value are 1) selling the bond before it matures or 2) an outright default. Locking in your results on the day of purchase is why individual bond purchases can make their claim of principal protection.

These are times of uncertainty. We shut down a large portion of our economy for 4 months. Amazon and Apple may have benefitted but what is the outlook for restaurants, cruise lines, hotels, shipping companies, retail shops, supply chains, medicine, medical equipment, commercial real estate, etc.? The government may throw more stimulus money at the issue and temporarily prevent an implosion, but what are the long term ramifications of flooding the markets with money? The press may focus on personalities but the election is pitting two very different philosophical and fundamental platforms against each other. How will this shape the future markets?

With so much uncertainty, don’t waver from the one thing you can control: disciplined principal protection. Reaching for more by increasing your risk may be temporarily gratifying but it also imparts the potential for devastating losses. Take some of your good fortune off the table. Protect your principal through disciplined asset allocation. Do not wait until it is too late.


To learn more about the risks and rewards of investing in fixed income, please access the Securities Industry and Financial Markets Association’s “Learn More” section of investinginbonds.com, FINRA’s “Smart Bond Investing” section of finra.org, and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) “Education Center” section of emma.msrb.org.

The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.

Stocks are appropriate for investors who have a more aggressive investment objective, since they fluctuate in value and involve risks including the possible loss of capital. Dividends will fluctuate and are not guaranteed. Prior to making an investment decision, please consult with your financial advisor about your individual situation.