Barron's had an article about reallocating retirement portfolios that have been derailed by the current bear market. There were comments from people citing statistics that have favored certain asset classes before and presumably these folks were relying on these statistics again. For example there was a quote about buying REITs when they yield more than ten year treasuries and that currently (per the article) REITs yield three times that of treasuries. The obvious question not addressed was whether the folks quoted bought REITs when the yield first surpassed the yield on treasuries. That would seem to be the implication and so as that was wrong how do we know that now it would be right?
A case was made for various segments of the fixed income market. It probably makes some sense to commit a little more to fixed income but the more I read about people suggesting the muni market the more I think something bad will happen there. A little bit of exposure to municipal paper is probably not a big deal but I am certain there are people pouring way too much in as they chase after yield. When has chasing yield ever been a bad thing (that is a sarcastic comment)?
As I mentioned the other day I think the yields in munis versus treasuries is warning of something bad and I do not want too much there in case that sentiment turns out to be correct.
There was one comment that was totally out of context that I wish they would have devoted more ink to which was someone's suggestion of having 20% in alternative assets which to the planner meant real estate, commodities and hedging strategies (ie absolute return). I don't know about 20% but I have been saying for ages that people need to learn more about this than they already know, being willing to commit a modest amount capital but I would say to avoid the private equity ETFs (I've written about these ETFs for TSCM and been down on them right out of the chute).
One subject that I think was left out, unless it was too subtle for me to realize, was investor behavior. Maybe more correctly called saver behavior. One consequence of the naughties (or if you prefer the oughts) may very well be that it will be more difficult for people of normal means to have successful retirements. There are several ways to mitigate this threat including saving more, spending less and working longer. No matter who you are your financial plan will benefit by doing those things (I realize not everyone can work longer). I'm not saying to necessarily stay at a job you dread, life is too short for that, but instead figure it out for yourself such than you can strike a balance with helping your finances, doing something you like and continuing to have purpose.
I get preachy about these things but quality of life is more important than money. It makes sense to sort these issues out before you're forced to do something in a hurried or desperate fashion.
11 comments:
A case has been made that muni yields are so high relative to treasuries because hedge funds et. al. are dumping them to meet redemption requirements. We saw the values fall during the Bears Stern collapse, and then we have seen them fall, recover, and fall again during the more recent crisis. Munis are relatively liquid compared to other holdings.
I would be curious as to what your "bad" scenario would be. Massive defaults?
"...quality of life is more important than money."
Exactly. I'm fortunate to be single and able to be content without a lot of 'things'. Unfortunately, I suspect most of the folks who read this blog are extremely money-driven; they have no concept of differentiating between 'needs' and 'wants'; in some cases it may be their spouse who has no concept. For those folks, I hope they heed your investing approach, i.e. 200 DMA, inverted yield curve, etc.
I am wary of justifications. There was plenty of justification for the yield curve being inverted, how'd that work out?
I don't know what the problem would be, that is the point, you don't have to know if you realize that something just may not be right. Things are not right in the fixed income market, states and counties need to access these markets to function as more and more of them have or will have deficits they become riskier credits. I think the yields are an attempt to compensate for these and other issues.
thank you 7:27.
I think the issue with relative yields is the massive amount of money going into treasuries pushing the price into the stratosphere. The "bad" scenario Roger alludes to could be the giant Ponzi scheme of the United States Federal Government collapsing. Most municipalities are much more conservative than congress when it comes to fiscal restraint. If the U.S. defaults, we're all toast.
On a related note, I have told my college aged son that the most important financial decision he will make in his life is who he marries. Love is important, but so is compatibility in other areas. Don't skimp on due dilligence.
Corporate bond returns are highly correlated with underlying equity returns. Think GM stock and bonds. If someone wants to increase the expected overall return of a portfolio, they should simply increase equity exposure.
A portfolio constructed with treasuries or munis as fixed income has held its value much better compared to a portfolio with corporate debt as the fixed income component. Treas/muni price movement is neutral to negatively correlated to stock prices.
Of course, if and when we do get a recovery, corporate bond and stock prices will move up together giving a false sense of diversification.
Agree with the article's assessment of dividend paying stocks. Someone should just buy Vanguard's Value index and get the diversification wihtout worrying about buying the next AIG.
Keep the comments rolling everyone!
It is not necessary to invoke hedge funds or apocalypse to understand what tends to happen to municipalities and their debt during a recession: Unemployment rises, businesses contract, tax base shrinks, ability to support new issues or service existing bonds is curtailed.
Add the fact that neither bond ratings nor insurance can be trusted as before and, like every other category of bond except treasuries, spreads are wide (we are in a credit crisis after all). There are some good deals out there but those who don't know what they are doing should probably stick to a fund like Vanguard's short-term muni that does the same.
May be best to stick with short-term muni's and cash for now even if you think you know what you're doing. I have been rebalancing back toward 60/40 after the big drop, but am very wary of bonds here, muni or otherwise. Much more confident adding to stock holdings. The big drop in muni's around Oct. was a wake-up call I think. And not just about hedge funds liquidating. State and local govts. are facing major funding shortfalls, many are not willing to issue more bonds with rates this high, and the institutional buyers have pulled back. I would not be surprised if defaults were to increase, rates continue higher from here, and other unanticipated scenario unfolds.
Ooops, left out an explanatory clause in the above: Conservative muni funds keep a very tight rein on duration and convexity, stick to very high quality issues and do their own research; they typically don't provide the highest returns in their class but when times turn tough their price hardly falls at all.
"As I mentioned the other day I think the yields in munis versus treasuries is warning of something bad and I do not want too much there in case that sentiment turns out to be correct." - I think it already has.
With their next win the Celtics can clinch their division. lol
Larry
I don't think the Madoff fiasco was entirely understood last week.
Now that the details are becoming widely known, Hedge Funds may be especially vulnerable to an investor stampede for the exit.
I'm staying out of their way.
OG
The next great depression will occur if municipal bond defaults are the next shoe to drop.
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