Peter Bernstein is the dean of finance economists. His newsletter is widely read–with good reason. We all learn something from it. In his latest missive, he offers up this insight on investment:
“Back in the 1950s, when I began my career in this business, investing “for income” was rapidly becoming old hat, appropriate perhaps for widows and orphans but not for red-blooded business executives who had to pay income taxes and were beginning to accumulate their estates. I remember one new client who told me, “Please remember I just can’t stand more income!” Soon after, the institutional investing world began to blossom, and their asset allocations have increasingly reflected the same philosophy – even though most of them these institutions paid no taxes. Income was for sissies.
In the new world spawned by the subprime mortgage crisis, the old view is dying out. Based on what we read, the notion of investing in corporate bonds instead of corporate stocks is gaining momentum. The idea makes a lot of sense in an environment where growth is going to be negative in the short run and likely to be less than vigorous over the longer run. The current income return from corporate bonds is significantly larger and more secure than dividend income and compares favorably with estimates of long-run economic growth. Finally, in case of catastrophe, the bonds will outrank the equities in a bankruptcy settlement. Thus, the superior contractual position of bond interest and the much higher income return form a favorable tradeoff for the investor in bonds. Income is for savvy investors.”
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