Betsy Trotwood

| November 17, 2023

The new interest-rate environment means that many investors will have to reevaluate what performance means. The adoption by the Fed of artificially low rates combined with a similarly artificial shortage of fixed-income investments made that an academic question for the last 15 years. Now that investors can lock in income for significant lengths of time, all of that has changed. Some of us will need to think like Betsy Trotwood.

You may remember Betsy as David Copperfield’s aunt and benefactor in Dicken’s novel of the same name. Betsy is a wise and prudent woman in the management of her funds. She is the opposite of the bankrupt Wilkins Micawber who explains “annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” *

Betsy used bonds to make sure that her income matched or exceeded her financial obligations. In this she engaged in a form of goals-based investing. Frequently clients have specific cash needs over months or years and bonds can help them match their income to the amount and duration of their obligations. For example, many retirees need to withdraw 4-5% from their portfolios every year to supplement their Social Security or pensions. Bonds today allow those investors to lock in a sufficient interest income for 30 years or longer. For investors trying to meet their bills, a bond is performing when the issuer pays interest and principal on time. This is exactly how the bank thinks about you when you pay your mortgage.

The old saying is that bond investors are concerned more with the return of their principal than the return on their principal. That is not exactly true. Bond investors want to receive a satisfactory income even during those periods when markets are down. The knowledge that the principal will be returned at a future date provides comfort and certainty during rough times. Bond investors want to avoid the world of Wilkins Micawber. Unless bondholders of quality bonds are forced to sell, performance compared to an index is immaterial so long as the issuer is solvent. Of course, prudent investors diversify by type of bond and length of maturity. That is what we are doing in our client’s accounts. We know that there is always a Uriah Heep lurking around.

* Dickens, Charles. “chpt. 12.” Essay. In David Copperfield. London: Penguin Books, 2021.