Burton Malkiel: 60/40 is dead

[haha]

For FI we use 2 offshore intermediate bond funds and USA FDIC insured CDs.

These offshore funds are PFICs?

Ha

 

[galeno]

The two offshore funds we use are PIMCO Ireland's version of PIMCO USA's PTTAX.lw and PAIIX.lw.

They are NOT PFICs as no USA citizens/residents allowed.

 

[haha]

The two offshore funds we use are PIMCO Ireland's version of PIMCO USA's PTTAX.lw and PAIIX.lw.

They are NOT PFICs as no USA citizens/residents allowed.

Thanks. I did not realize you are not a US citizen.

Ha

 

[clifp]

REITs are a form of equities, albeit with less correlation than with most other equity asset classes, so it looks like he is advocating a very high percentage of equities for someone in their 50s.

I don't really understand his fetish for tax-exempt bonds in particular, though. Not that these are bad, but they have the same interest rate risk and inflation risk as corporates and Treasuries, do they not? Emerging market bonds, at least, have some additional "play" on foreign interest rates, currency rates and potential for appreciation through improving credit risk. (That said, these are also additional risks!)

Well my portfolio certainly resembles the one Malkiel advocates. Although I count dividend stocks as equities, and a fair amount of my REITs exposure is with individual properties. I am looking at emerging market bonds, anybody have a recommendation for a fund/ETF?.

I think the reason for favoring tax exempt vs US bonds is that on relative ratio the yield is much higher than historical averages

 

[NW-Bound]

I have been looking at EMB and PCY. These are the two largest EM sovereign bond ETFs, but at $3.64B and $1.88B respectively are not that large compared to stock ETFs. The trading volume is high enough to guarantee some liquidity.

The current yield is close to 5%, and both have been down more than 10% YTD. Is it a good time to buy? Beats me, but I just took a small nibble in PCY. EMB is rated ** by Morningstar, while PCY is ****.

EMB is currently traded at a small discount, while PCY is at a small premium. In 2008 when these funds just came out, there were a huge price/Nav discrepancies. I guess they were too new then, and so the market efficiency did not catch up with them. ER's are a bit high at 0.6% and 0.5% for EMB and PCY.

PS. I can trade PCY commission-free at Schwab for a before-tax account.

 

[haha]

I have been looking at EMB and PCY. These are the two largest EM sovereign bond ETFs, but at $3.64B and $1.88B respectively are not that large compared to stock ETFs. The trading volume is high enough to guarantee some liquidity.

The current yield is close to 5%, and both have been down more than 10% YTD. Is it a good time to buy? Beats me, but I just took a small nibble in PCY. EMB is rated ** by Morningstar, while PCY is ****.

EMB is currently traded at a small discount, while PCY is at a small premium. In 2008 when these funds just came out, there were a huge price/Nav discrepancies. I guess they were too new then, and so the market efficiency did not catch up with them. ER's are a bit high at 0.6% and 0.5% for EMB and PCY.

PS. I can trade PCY commission-free at Schwab for a before-tax account.

Are these two actively managed or index matching?

Ha

 

[Theduckguru]

Here's the inflation since 2000. Except for 2009, there was no deflation. Looking forward, it is difficult to see how it can recur.

Year	Inflation
2000	3.4
2001	2.8
2002	1.6
2003	2.3
2004	2.7
2005	3.4
2006	3.2
2007	2.8
2008	3.8
2009	-0.4
2010	1.6
2011	3.2
2012	2.1
2013	1.5 YTD

I cant predict the future and do not claim I can, BUT fuel is trending down and is expected to be a couple of percent lower in 2014 compared to 2013. In turn, grain is declining as well and that may translate into lower food inflation in 2014. Increasing mortgage rates may stop increasing housing values. Health care costs are flat as well. That 1.5% inflation in 2013 might be an indication of some very low inflation in 2014.

So I think you good with bonds through 2014.

 

[veremchuka]

REITs were killed this year. I think they are even more interest-rate-scare sensitive than bonds!

That's what I thought.

REITs: 12.5 percent

in a rising rate environment REITs will fare poorly from what I understand.

 

[NW-Bound]

Are these two actively managed or index matching?

Ha

EMB follows the J.P.Morgan EMBISM Global Core Index, while PCY is based on the DB Emerging Market USD Liquid Balanced Index.

See PCY - Emerging Markets Sovereign Debt Portfolio and EMB - iShares J.P. Morgan USD Emerging Markets Bond ETF.

Has anyone heard of these indices before? It always seems to me an index fund is simply an active fund that has delegated its stock/bond picking to a committee who decides what goes into the index.

Anyway, both of these funds have a duration of 7 years, and they track each other within a few percent in the last 4 years.

I cant predict the future and do not claim I can, BUT fuel is trending down and is expected to be a couple of percent lower in 2014 compared to 2013. In turn, grain is declining as well and that may translate into lower food inflation in 2014. Increasing mortgage rates may stop increasing housing values. Health care costs are flat as well. That 1.5% inflation in 2013 might be an indication of some very low inflation in 2014.

So I think you good with bonds through 2014.

Oil and commodity prices have been fairly tamed, though I don't think they will decline to the point of causing overall deflation. Anyway, I have been tempted to get back into bonds with some of my cash, and will DCA into shorter duration bonds. I would not touch funds with 15-year duration.

 

[audreyh1]

That's what I thought. in a rising rate environment REITs will fare poorly from what I understand.

To see how they behaved this year, you have to look at their performance since May.

My bond funds overall are down about 1% since late May including reinvested dividends.

My REIT funds, which had a huge run up into May, are down 9% since I rebalanced on 5/20. That's quite a clobber!

The REITs had been up 17.5% up YTD on May 20 (which is why they got rebalanced). It's one of my most volatile asset classes.

 

[mickeyd]

Nice article that made me think a bit more than I wanted to on TG day.

I have been a big Malkeil fan since RWDWS. I'm about to rebalance back to my 60/40 AA (from current 65/35) and have no problem with sticking with my 60/40 AA regardless what BM states in the piece. Have not heard a lot about staying the course here, but that's what this L/T investor is going to do.

 

[nun]

For a long time I've been 50/50 and have watched my bonds return -1.5% for the last year. I'm entirely in short or intermediate term bond funds or stable value and have a long term buy and hold strategy so I have not been overly concerned about potential interest rate increases. I have increased my stable value allocation as I approach retirement so that I have a good income cushion.
However, I now have the opportunity to buy into the MA state defined benefit retirement plan and estimate that $268k will buy me a COLA'ed pension of $19.5k a year starting in 2.5 years time when I am 55 years old.

So it looks like my allocation going into retirement will be 3% cash/20% DB plan/10% stable value/10% Wellesley bonds/57% stocks, 60/40 does indeed look dead to me.

 

[daylatedollarshort]

For a long time I've been 50/50 and have watched my bonds return -1.5% for the last year. I'm entirely in short or intermediate term bond funds or stable value and have a long term buy and hold strategy so I have not been overly concerned about potential interest rate increases. I have increased my stable value allocation as I approach retirement so that I have a good income cushion.
However, I now have the opportunity to buy into the MA state defined benefit retirement plan and estimate that $268k will buy me a COLA'ed pension of $19.5k a year starting in 2.5 years time when I am 55 years old.

So it looks like my allocation going into retirement will be 3% cash/20% DB plan/10% stable value/10% Wellesley bonds/57% stocks. Add $15k annual rental income, $5k company pension and SS checks from the US and the UK and I think I'm nicely diversified.

That is a well diversified plan. Good job.

 

[galeno]

I'm also thinking about cutting back our equity from 65% to 60%. I'm also thinking of diversifying into a REIT for 5% of port vs overweighing EM equities by 5% because they are cheap.

The forward PE for the REIT = 38. The forward PE for the EM equities = 13.

REIT or EM stocks?

Nice article that made me think a bit more than I wanted to on TG day.

I have been a big Malkeil fan since RWDWS. I'm about to rebalance back to my 60/40 AA (from current 65/35) and have no problem with sticking with my 60/40 AA regardless what BM states in the piece. Have not heard a lot about staying the course here, but that's what this L/T investor is going to do.

 

[explanade]

What happened with bonds and bond funds in 2008-2009 when there was a "flight to quality?"

IIRC dollar went up vs. other currencies. How did US bonds and bond funds fare against the emerging market bonds?

How did REITs fare when housing bubble burst?

 

[audreyh1]

What happened with bonds and bond funds in 2008-2009 when there was a "flight to quality?"

IIRC dollar went up vs. other currencies. How did US bonds and bond funds fare against the emerging market bonds?

How did REITs fare when housing bubble burst?

How did REITs fare when the housing bubble burst? - Terribly, they behaved even worse than the S&P 500
FRESX Chart Fidelity Real Estate Investment Fund Chart

What happened with bonds and bond funds in 2008-2009 when there was a huge flight to quality? How did US bonds and bond funds fare against the emerging market bonds?

US government bond funds, and bond funds with a high allocation to US treasuries did well - increasing value while the stock market dropped. Corporate bonds, muni bonds, international bonds, emerging market bonds and high yield bonds didn't do so well. Some bond funds suffered as much as stocks, at least temporarily, due to the credit crisis. FNMIX an emerging markets bond fund was down over 18% in 2008, Fidelity High Income Fund (high yield) dropped almost 24%.
MWTRX Chart Metropolitan West Total Return Bond M Fund Chart

 

[explanade]

So it's a strange recommendation that the professor makes, unless he's absolutely sure that stocks will continue to go up and we'll never have anything comparable to what happened in 2008 ever again.

Maybe he's basing it on high inflation in the late '70s and early '80s?

 

[audreyh1]

What is really baffling to me is the 12.5% REIT fund recommendation.

Maybe that's just because REITs sold off so much in the last 6 months so they are now "undervalued"?

But, IMO, people piled into them looking for better dividend payouts, and as soon as there is a whiff of a Fed rise in interest rates (or tapering of QE), REITs were severely punished. It's a very volatile asset class which is OK as long as you rebalance regularly.

I limit REIT funds to 5% of my overall equity allocation, and that is a little over 2.5% of my total portfolio.

 

[galeno]

As you probably know, REITs are a good diversifier for equities. I'd like to put 5% of port into SCHH (REIT) but really think I should bump our 10% position in SCHE (EM stocks) to 15% instead.

 

[samclem]

What is really baffling to me is the 12.5% REIT fund recommendation.

I don't know either, but maybe it's their dividend stream (not their share price growth) that he's looking at? In the last 30 years REITS have typically had dividends of about 1.1% above the 10 year Treasury rate, and right now it's close to 2%. Depending on the types of properties/mortgages owned by the REIT, the income might be only indirectly tied to equity prices/stock market performance, which might be attractive to a retiree with a bunch of equity investments.

Anyway, this would be consistent with Malkiel's (new) specific calling out of dividend-paying stocks as a category to own. But I'm just guessing.

 

[audreyh1]

Dividend stocks will get hurt too when interest rates rise.

 

[target2019]

Consider Dividend Growth Investing (DGI). Only invest in dividend champions, and it matters little when the NAV drops for awhile.

 

[RobLJ]

I have been looking at EMB and PCY. These tthe two largest EM sovereign bond ETFs, but at $3.64B and $1.88B respectively are not that large compared to stock ETFs. The trading volume is high enough to guarantee some liquidity.

Those are the right ETFs for EM.
For active, I've been in Templeton's GIM for more than 10 years, in my wife's Roth. Had one of it's worst years, but it's made a lot money.
I also use Fidelity's New Market's Income (FNMIX).

Caveats are
1) This is "risk"-ier than traditional notions of US bonds, although I like the like long term prospects of these. Dollar denominated bond funds reduce the volatity or can but don't hedge against the dollar, which is fine for most.

2) As Malkiel suggests, I've done this for the last 3 years as part of my bond allocation. I've also reduced duration considerably, sold the TIPS fund which began disturbing me at negative yields several years ago, and moved longer duration to floating funds and cash.
If I had bond money available in taxable accounts rather than locked in 401 and 403b, I would have used, as a portion of the above, Guggenheim bullet funds and laddered Treasuries bonds. You deal with the tools you have.

3) For those who are active, you could play the CEF funds in EM and munies, as I have done on a small scale, with mixed results. It's basically buying at a discount and selling at a premium.

4) If TIPS return to 0 yield, then I'll be interested in TIP funds again. And if longer term Treasuries take another big hit, I'll start slowly cost averaging, over 10 years. I suspect the market got ahead of itself expecting yield increases, but we'll see.

My allocation is similar to what Malkiel recommends, save for the fact I have a minimal allocation in REITS & more cash but am dollar cost averaging very, very slowly into them. I find EM bonds more attractive.

None of the above is advice, since it works only for me, my circumstances, and my portfolio. But the synch between my portfolio and Malkiel's was interesting. If I have the ability to buy individual bonds in the future, I will do so, since a lot of my allocation is based on the fact that I am locked into primarily using bond funds.

 

[galeno]

SCHD which holds the 100 best DGI stocks has a nominal SEC Yield = 2.67%. Its ER = 0.07%.

Our port's ER = 0.21%. Taxes = 0.42%. Inflation = 2.50%.

A port of 100% SCHD net real yield now = -0.39%. Call it -0.4%.

Consider Dividend Growth Investing (DGI). Only invest in dividend champions, and it matters little when the NAV drops for awhile.

 

[ETFs_Rule]

Don't lose sight of the fact that bonds protect you from stock market drops. Then you reallocate.

They say to avoid the longer term bonds due to interest rate risks. But....
VWAHX (vanguard High-Yield Tax-Exempt) is more volatile than BND (the total bond market).
FIVZ PIMCO 3 - 7 Year US Treasury Index ETF) is only slightly less volatile than BND.
So when investing in bonds I don't know if we even need to do any bond cherry picking. Just buy the total bond market.

BTW this portfolio builder (from Ric Edelman) is interesting....
https://gps.ricedelman.com/