Any upside in the next 6 months?

[mathjak107]

My problem with buying bonds right now is that they don't really have much upside, and potentially have just as much downside as stocks.

Treasuries are very likely to erode your purchasing power at these prices, even at a modest 2% inflation rate.

What do high quality corporate bonds yield right now?

I'd rather own the large multi-national stocks that yield 3-4% right now.

if long term rates fall 1% that is a 30% capital gain , works for me. rates have room to turn negative too. sweedens 5 year was at a negative interest. its strictly a capital gains game not interest rate.

short term there is a whole lot of trouble out there that can cause a flight to safety as well as an entire world deleveraging.

the bail out of europe will require lots of asset selling of all kinds and the selling of assets is deflationary.

as much as i can see the longer term rates coming down is the exact reason i see stocks falling in the short term too.

there isnt much out there that has a pretty good shot at a 30% gain and a floor of 2.5% .....

 

[xyz]

This is rather interesting. Isn't it all rather relative? I run around 50% / 50% but I am quite pleased with a tidy return on equity on the amount that is there or if there is a big loss on the equity side I am glad the bonds are relatively stable. Only thing I am watching for is an increase in interest rates but that does not look like it is going to happen for a while. I guess I am rather conservative (I don't buy lottery tickets either) and would rather not bet heavily on equity. I do understand there are alot of people who make out very well in the market but I kinda like the slow and steady wins the race approach. Areas I am currently looking at related to my personal investing is world economy and where are businesses going.. In other words fundamentals. It appears business is trending slower (I work in a global business so I see it happening) but not the big slide we had in 2008. If I were to see a major upturn in business I would probably move 10 - 20% more into equity but would probably hold the course if there is a downturn. Same thing holds true if interest rates start trending up I will start to reduce the bond exposure. Thoughts?

 

[REWahoo]

Same thing holds true if interest rates start trending up I will start to reduce the bond exposure. Thoughts?

Where will you move the money from the reduced bond exposure - equities? cash?

 

[xyz]

Depends on where interest rates go. I have little in cash now due to the low rates today so if returns improve there I would move some there. I also would look at the business climate to determine potential areas to invest. I am looking at it this way, if interest rates are rising returns on cash will improve and as they say bonds will go down so it makes sense to shift. The key will be to watch the fed moves, the news (who knows what will happen in the world), and business.

 

[Lsbcal]

...(snip)... If I were to see a major upturn in business I would probably move 10 - 20% more into equity but would probably hold the course if there is a downturn. Same thing holds true if interest rates start trending up I will start to reduce the bond exposure. Thoughts?

I wonder how you get ahead of the stock market in terms of seeing upturns in business. Isn't the stock market looking out more efficiently? I think of the stock market as the event horizon.

Regarding bonds, it is tricky moving away from bonds as rates move up because no one knows how fast they will move up or how far. If you look at previous rate rises, the bond markets have sometimes had poor returns before rates started moving up (anticipation). So how to get ahead of the bond market?

I don't mean to be disagreeable, just have asked myself these same questions. My own answer is to use trend analysis on the bond market to compare cash, intermediate Treasuries, and an intermediate broad bond fund. I'm willing to make month to month adjustments as the target moves.

 

[xyz]

I wonder how you get ahead of the stock market in terms of seeing upturns in business. Isn't the stock market looking out more efficiently? I think of the stock market as the event horizon.

I would hope a strong business environment will cause most businesses to increase in value, but in today's environment who knows! Things looked good late last year and coming into this year but this fourth quarter should be interesting.

Regarding bonds, it is tricky moving away from bonds as rates move up because no one knows how fast they will move up or how far. If you look at previous rate rises, the bond markets have sometimes had poor returns before rates started moving up (anticipation). So how to get ahead of the bond market?

That's a good point.. I am nervous about that.. I have done it before and it worked but it's a bit of a gamble isn't it? Your approach sounds interesting.

 

[haha]

Same thing holds true if interest rates start trending up I will start to reduce the bond exposure. Thoughts?

So it appears that you a trend follower? Many people are, but that seems to be opposite from the more commonly followed plan around here of buying weakness and selling strength.

Ha

 

[Koolau]

I mean I am market timing and lightening up on stocks unless you all can convince me otherwise.

Deep background: We made our number a few years ago, so we don't really to take the risk of just 31% bonds even though I have generally laughed at risk in the past. Also, though we are still working, maybe we'll quit our jobs in the next year.

If by moving to 40% bonds you intend to be more "conservative", I think that makes sense, since you already have your "number." Why push things when you can ER at any time?

If I hear what you are saying, you are simply suggesting that now might be the time to make such a move (toward the conservative) because you ALSO see an additional market upside potential (market timing) while achieving your ultimate goal of becoming more conservative. I have no opinion on the upside potential, but becoming more conservative once you have an adequate stash makes a lot of sense to me. That's what I did. Naturally, YMMV.

 

[copyright1997reloaded]

Disclaimer: As of 9/30/12, I was approximately 60% equity, 40% fixed (not including my home). Having said that, there is very little in the bond market that appeals to me, and I would be hesitant to commit to any debt instrument of longer duration. Yes, I know rates could potentially go negative (with resulting capital gains), but there is just too much of a coordinated effort by central banks (for me) to play that risk/reward game.

Of late, I've been hurt (performance wise) from this philosophy. Most of my longer duration holdings are the inflation adjusted variety, which have had a great run up, but that is past performance. The rest is very short term, i.e. cash and equivalent, so no return there (negative return if you consider inflation). I've been too chicken to commit this in mass to the market (just little amounts), mostly hoping to leave it waiting for higher rates or other more extreme market opportunities (and actually thinking of buying property at some point as an alternative investment).

 

[ejman]

Disclaimer: As of 9/30/12, I was approximately 60% equity, 40% fixed (not including my home). Having said that, there is very little in the bond market that appeals to me, and I would be hesitant to commit to any debt instrument of longer duration. Yes, I know rates could potentially go negative (with resulting capital gains), but there is just too much of a coordinated effort by central banks (for me) to play that risk/reward game.

Of late, I've been hurt (performance wise) from this philosophy. Most of my longer duration holdings are the inflation adjusted variety, which have had a great run up, but that is past performance. The rest is very short term, i.e. cash and equivalent, so no return there (negative return if you consider inflation). I've been too chicken to commit this in mass to the market (just little amounts), mostly hoping to leave it waiting for higher rates or other more extreme market opportunities (and actually thinking of buying property at some point as an alternative investment).

I'm having a similar problem. At the upper edge of my rebalancing set point for equities but rebalance into what? My gut tells me a Japan like scenario is likely and if that is the case rates for bonds will stay down for a long time. At the same time the return on short duration bonds is zilch over inflation. I guess at this point the overriding consideration is don't blow it by seeking yield and increasing risk out of proportion. Keep the powder dry and if it takes a few years so be it.

 

[samclem]

If by moving to 40% bonds you intend to be more "conservative", I think that makes sense, since you already have your "number." Why push things when you can ER at any time?

As always, there's the question about what "conservative" means. Avoid potential (temporary) reductions in portfolio value (but less likely to grow in real terms or even keep pace with inflation)? Investing in a mix of assets that has historically been able to keep pace with inflation (but can drop in value for years before recovering)? Investing in individual govt bonds that may lose value in a rising rate environment but will pay out if kept to maturity?

Kinda like politics: When a person says they are a "conservative" I have to ask more questions before I know what they really mean.

 

[audreyh1]

If we have a Japan like scenario, I'll just spend down my "overvalued" bonds while I wait for stocks to recover. If we have a jump in inflation, I may have a few years of spending down stocks instead and buying more bonds when I rebalance. Maybe my bonds will get cut 10%?

In either case, I suppose that there could be a few years where my total portfolio drops for a while before eventually recovering. It's happened before, and I'm sure it will happen again.

 

[ejman]

If we have a Japan like scenario, I'll just spend down my "overvalued" bonds while I wait for stocks to recover. If we have a jump in inflation, I may have a few years of spending down stocks instead and buying more bonds when I rebalance. Maybe my bonds will get cut 10%?

In either case, I suppose that there could be a few years where my total portfolio drops for a while before eventually recovering. It's happened before, and I'm sure it will happen again.

Yes, makes sense but if for example, one's goal is 50/50 then just at the time one should be adding to bonds to keep the even split one is instead liquidating bonds thus getting further out of balance. The reason I'm so conflicted is that following the AA no matter what has kept me from doing dumb stuff in the past. Somehow this time it feels "different" (Yes I know how dumb that statement is...)

 

[audreyh1]

Huh? Don't see how things are going out of balance. I'm close to 50/50 [53 eq/47 fi, actually]. In the "Japan scenario" above I was assuming stocks don't do well and bonds do, so you draw on bonds for a while.

I don't see the case where "just at the time one should be adding to bonds to keep the even split one is instead liquidating bonds thus getting further out of balance." You would add to bonds presumably after an inflation spike causes bonds to sell off.

 

[CCdaCE]

I guess the only thing I've been eyeballing is the energy sector, specifically Vanguard's Energy ETF (VDE). If you compare it to VTSMX, for instance, it hasn't gotten so overpriced YTD, and only has a 1.3% yield, so people aren't chasing that. But, it's broad and cheap, the P/E is somewhat sensible; but it's a sector, so I'd rebalance out of something (stocks, bonds?) and into that.

Tough call. It's come off its Sept. high since the embassy fiasco and higher oil prices, but, is up 4-5% since last month. It's done slightly worse than the TSM fund in the last 5 years, but much better in the last 10 years. 109% vs 37%.

For the record, todays closing was 106.80.

-CC

 

[Hamlet]

What happens if long term rates go to 5%?

You'll lose a whole lot of money.

The floor isn't 2.5%

there isnt much out there that has a pretty good shot at a 30% gain and a floor of 2.5% .....

 

[LOL!]

These were great comments which I did not have time to address until this weekend. I've put my response in blue.

Not trying to convince anyone of anything but interested in hearing more about your reasoning:

1. By adding bonds, you are taking on interest rate risk (how much depending on your duration) and possibly credit risk (depending on which bonds you buy) - in effect exchanging one risk for another
True, but Bernanke and others have already telegraphed that interest rates will not rise or if they do, will not rise much. Furthermore, I am shortening durations by using a significant chunk of short-term bond funds.

2. You mention the US and Europe, but not other developed markets or emerging markets or other asset classes for that matter
I do not believe that emerging/developing markets have much upside for the next 6 months as well. I've owned separate emerging markets funds (VWO, EWX, DGS) for a number of years now. EM countries need to sell things to developed countries such as gas, oil, widgets. If developed countries are under austerity measures, developing countries are going to suffer as well.

The only other separate asset class I own are REITs. They have already dropped 5% off their September highs.

3. You mention no "major" upside but not that you are expecting downside?
I cannot predict a downside, but I would hope for one after shifting my asset allocation, so that I can take advantage of a drops and buy low. People have been predicting doom and gloom for quite a while and it hasn't happened. I note that since you posted this and my response today, that reported unemployment levels have dropped under 8% which limits downside.

4. Why six months as a time horizon? It gets you past the US election, the US "fiscal cliff" and possibly some developments in Europe (or not) but I'm not sure what else?
My crystal ball gets really fuzzier and bunnier if I write about more than 6 months time-frame.

5. there is also the much debated "missing the best days" arguement: Missing Best & Worst Days of S&P500 | The Big Picture Note: the more interesting/important points are made in the comments linking to some earlier Mebane Faber articles which suggest that this is not a point to worry about at this stage of the US market
I am very familiar with missing the best days arguments. I am not going to 0% equities, but will still have at least 60% of portfolio invested in equities within a few weeks. I am also more familiar with missing the worst days arguments. I always invest on worst days no matter what.

I wouldn't mind finding some other asset classes that show positive real returns but its hard.

 

[LOL!]

I found this amusing quote in yesterday's WSJ: What Investors Should Do Now - WSJ.com

But investors should prepare themselves for a rough road ahead, experts say. During the next six months, markets face a number of challenges.