How To Respond to a Low Interest Rate Environment (80+, weather, friendly)
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I have always disliked owning bond funds instead of bonds - including those that operate as ETFs. Because they lack 2 important characteristics of bonds. First - they don't have a fixed maturity date. Second - they don't "fix" your income for any particular period of time.
To give an idea how these things operate in the real world - say I buy a 15 year bond at the worst possible time - when interest rates are the lowest they'll be for the next 15 years. The value of the bonds will go down and down and down. But - if I hold those bonds for 15 years - I will get all my principal back when the bonds mature. FWIW - I had some experience with this during the great "bond bust" in the late 70's and 80's. Some of the bonds I was holding then were down 25-30% in terms of value over a multi-year period. But - I did eventually get all my principal back at call/maturity. This won't necessarily happen with a bond fund.
Second - the 30 day SEC yield of a bond fund can bear absolutely no relation to the "real yield" of the portfolio - i.e., - the yield to call/maturity (a number which you can find pretty easily - but which most people don't look at). If you go through new issues - especially in the muni area - you'll see issues that are specifically priced for institutional fund buyers who want to show high current yields. For example - I bought the Phoenix munis with a coupon of 3.125% and a price of 97 and change for a YTM of about 3.2-3.3%. The issue maturing before the one I bought had a coupon of something like almost 5% with a price of about 115 (forget the exact numbers) - with a YTM of about 2.9%. This is an issue that is priced for a muni fund that wants to show a high current 30 day SEC yield - not for a normal investor.
That said - I think there are 2 reasons to use ETFs (and - to a much lesser extent - mutual funds). First - to avoid getting involved with credit quality evaluations of individual bonds. I like to have part of my portfolio in junk at times - and I don't have the time or inclination to evaluate the credit quality of junk bonds. With regard to investment grade corporates - I used to be comfortable buying and holding them. Since the early to mid-2000's - I think "investment grade" corporates have become as difficult to evaluate in terms of credit quality as junk corporates. So - were I to go into corporates again - I'd probably use the LQD (I found BABs gave me more bang for the buck the last 2-3 years - but BABs are relatively unattractive IMO these days).
Second reason is if you want to trade. Which I do with junk bonds (using charts and technical analysis). I'd say my average holding time is measured in months/years - as opposed to days/weeks. But I don't want to be in junk during an economic downturn. Probably not investment grade corporates that can - it seems today - turn into junk or near-junk in a relatively short period of time. Trading individual bonds isn't a tidy proposition even for an institutional investor - and it's a real mess for a retail investor in terms of buy/sell spreads. With ETFs like HYG - JNK - LQD - spreads are usually a penny except in times of great market stress.
I don't much like equities. And what little I do with equities - I do through ETFs (again - position trading them). I do have positions in some high dividend ETFS - like XLU - HDV - DVY. But I really don't love/trust them right now - because of uncertainty about the taxation of dividends in 2013. They are certainly not a buy and hold forever in my portfolio (just about nothing in my portfolio is a buy and hold forever no matter what - although the triggers for selling various things vary considerably).
FWIW - one of the reasons I trade part of my portfolio - especially the equities part - is I started to invest in the 1970's - when buy and hold didn't work at all. Things changed in the 80's and 90's - and the 2000's have pretty much been a return to the 1970's. I got involved in technical analysis in the 1970's - and have pretty much stuck with it for almost 40 years now. Especially since it is much much easier and cheaper to do it today than 40 years ago (I used to do charts by hand ). About the only conclusion I have reached over the last almost 40 years is the best trading system will never outperform a raging bull market - and the worst trading system will always outperform a raging bear market (and just about any trading system will almost always keep even with a long term sideways market).
I honestly don't know what the difference is in terms of investing for yourself/your own retirement - and investing for your heirs. Anything that benefits you should benefit them - and anything that doesn't benefit you shouldn't benefit them. Perhaps you have something specific in mind that I'm not seeing? Robyn
I agree with you about bond funds not acting like individual bonds. I do like the fact that an individual bond will provide the yield at purchase when held to maturity. One of the advantages of a bond fund is reduced risk because any one bond defaulting is spread over a portfolio of bonds. That same bond held individually will be a big impact in your portfolio.
I've never been a technical analysis trader, mainly because of the constant monitoring. It gets back to the lazy factor. I really don't want an investment job in retirement, although, early on I thought that's what I would be doing.
If I wasn't investing for my heirs, I'd likely be adjusting my asset allocation as I get older, moving more into cash and fixed income. With investing for my heirs, I'll likely keep a larger than normal equity allocation. We are fortunate in that I think our pensions and SS will meet out needs when they all kick in, with the IRAs covering our early needs and inflation later in life. From my analysis, a 2% return leaves little at the end of my projection. A 4-7% return leaves the kids with a good start on their retirements. So that means we'll take the risk of cutting back on expenses if the equity market isn't cooperating with the plan.
long enough means whatever the duration number is for that fund. right now as an example the duration figuure for the fidelity intermediate term treasury bond fund is 6.6 years. the gnma fund is 3.3 years.
Right now cash, not stocks, not bonds are is about the best place to me. All other asset classes are in serious danger of being losers. Real estate, in the right place might be a good place to be. At any rate, not losing money is probably the best alternative now, until we get a new President.
when we try to out guess things thinking we know we generally are wrong.
there is almost no one i know who predicted long term treasuries would be the winners last year especially with rates this low.they had amazing gains.
in fact tell us who predicted long term treasuries would have out performed every other asset class over the last 1 yr ,3 yr,5 yr ,10 yr ,20 yr and 30 year time frames.
im not saying they will or will not be this years winner , just that no matter what we all see there are things not even on the radar that usually make our best outllooks wrong.
the best time do do things is when the outlook looks bleak.
the best ralleys for equities is when things look so bad only a fool would buy them. the bigges drops come when things couldnt look better for the markets and they are breaking new highs.
think about it.
most small individual investors fail at investing for no other reason than they dont stick to a stratagey. they try to time things thinking they have a handle on
whats next.
ibbotson/morningstar studies show that small investors as a group have gotten less than 1/3 of the gains the funds they were in got as they tried to cherry pick when to be in them and when to be out .
Last edited by mathjak107; 05-26-2012 at 03:48 AM..
I'm into hydroelectric stocks from Brazil (Ticker symbols AESYY and AESAY) and Mortgage REITS (Ticker symbols NLY and AGNC). All of the above pay dividends. The Brazilian stocks pay approx. 10% (based on the price I purchased them at) and have the potential for currency appreciation. The Mortgage REITS pay approx. 14% , but you have to be careful when/if the interest rates ever go up.
I'm into hydroelectric stocks from Brazil (Ticker symbols AESYY and AESAY) and Mortgage REITS (Ticker symbols NLY and AGNC). All of the above pay dividends. The Brazilian stocks pay approx. 10% (based on the price I purchased them at) and have the potential for currency appreciation. The Mortgage REITS pay approx. 14% , but you have to be careful when/if the interest rates ever go up.
Most of what I invest is in a mutual fund that is allocated among: 1. large capital stocks; 2. small capital stocks; 3. private corporate bonds; 4. U.S. government bonds, etc.
I prefer the stock market with the chance of an investment appreciating to low risk bonds with equally low interest rates.
However, what you are doing is about equivalent to investing in gold mines and oil wells. I wish you good luck over the long term. You'll need it.
I'm into hydroelectric stocks from Brazil (Ticker symbols AESYY and AESAY) and Mortgage REITS (Ticker symbols NLY and AGNC). All of the above pay dividends. The Brazilian stocks pay approx. 10% (based on the price I purchased them at) and have the potential for currency appreciation. The Mortgage REITS pay approx. 14% , but you have to be careful when/if the interest rates ever go up.
you have to be real careful with mortgage reits and read those reports carefully. many times those high dividends arent really that high and include a return of capital dropping your share price to match, or use borrowed money to sustain those payouts or the money comes from isolated events not associated with the reit income..
both most un-good and both slide right under the radar to the untrained eye on those quarterly reports.
im not saying thats the case with yours but just in general be careful.. in a world of low low rates a 14% payout bears watching where its coming from..
Agreed, slogging thru the financials can be a bear, but in this environment of low to no dividends, I feel I have to take a bit more risk.
I don't want to play the market and look for stock price appreciation. I know I can't win at that .. too many psychology programs out there on Wall St. to psych the retail investor out. That's why I am into dividend stocks, I want something besides the hopeful stock appreciation for the risk I am taking.
Anyway, that's my opinion for what its worth. It has been working for me so far.
Agreed, slogging thru the financials can be a bear, but in this environment of low to no dividends, I feel I have to take a bit more risk.
I don't want to play the market and look for stock price appreciation. I know I can't win at that .. too many psychology programs out there on Wall St. to psych the retail investor out. That's why I am into dividend stocks, I want something besides the hopeful stock appreciation for the risk I am taking.
Anyway, that's my opinion for what its worth. It has been working for me so far.
Part of the problem with high dividend stocks is many are in indices. And - when the indices are sold off in baskets (which they often are - they're bought that way as well) - the buying/selling doesn't distinguish a whole lot between the stocks that pay dividends - and those that don't. For example MO - with a dividend yield of 5.1% - went down 1.55% today (better than the SP500 overall - but nothing to write home about).
I do believe that - in a declining market - that stocks that have high (and sound) dividends will outperform stocks with lower or no dividends. But - there's an old saying - you can't eat relative performance (unless you're a money manager who gets a bonus for outperforming your index - even if that means you're down by 6% when your index is down 10%).
Note that I hate the current investment environment. And my husband and I made a decision last night. Over the course of many years - I have felt comfortable keeping as little as 3 months in living expenses in cash. We plan to increase those cash levels to about 2-3 years for the indefinite future. Robyn
Note that I hate the current investment environment. And my husband and I made a decision last night. Over the course of many years - I have felt comfortable keeping as little as 3 months in living expenses in cash. We plan to increase those cash levels to about 2-3 years for the indefinite future. Robyn
Wow!!! Robyn - I was quite surprised at your "up to now" living expense/cash timeframe. I know you are a serious guru in the investment arena, most especially in bonds. But that short timeframe was a surprise.
I've been an ultra conservative type (for me, no opinion regarding others) of having 5 years in cash just so I don't have to think about it.
The benefit of the current environment is that "sitting cash" isn't really losing much to opportunity cost, but regardless - I've always looked at cash as my best defense against unknowable and rude surprises. Yes, I've lost in not utilizing it more effectively but I don't loose any sleep about the intermediate future. JMO
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). About the only conclusion I have reached over the last almost 40 years is the best trading system will never outperform a raging bull market - and the worst trading system will always outperform a raging bear market (and just about any trading system will almost always keep even with a long term sideways market).
Agreed, slogging thru the financials can be a bear, but in this environment of low to no dividends, I feel I have to take a bit more risk. 
