Quest for yield verus safety

[unclemick]

Given the current low interest rates and the fact that market value will drop if/when interest rates go up - what are some of the risk/reward corners of the investment universe ER's are investigating and how are you approaching the emotional aspect of market fluation?

We have minor amounts (10-15% of total ER portfolio) of conv. bond fund, high yield corporate, REITS, electric utilities).

 

[JWR1945]

Re: Quest for yield versus safety

I do not depend upon my investments for income. My pension (Federal Government old system, no longer available to new employees, CSRS) is more than sufficient and it grows to match inflation. What is more, my health insurance costs and coverage are the same as that of those still working.

I am in a very slow, gradual precess of selling stocks because of valuations. I am a great fan of procrastination in this regard. I will be re-examining every one of my holdings to see if their prices make any sense whatsoever. Nothing less that a screaming sell immediately will cause me to sell. In one case I have mentally (emotionally) written off a stock. If it comes back, great. But it is close enough to zero that selling has no appeal whatsoever.

In my mind the current market is screaming sell soon, but not right now.

As it turns out, the kinds of stock I own are the kinds of stock that I would buy in today's market, given an opportunity. That again speaks for inaction on my part.

When I do sell, I will be satisfied to hold cash (actually, money market funds) at zero percent nominal interest. I will remain comfortable doing that for at least two or three years.

Again, the fact that I do not need the money affects my actions and shelters my emotions.

Have fun.

John R.

 

[Cut-Throat]

JWR,

I am in a similar frame of mind. I sold off a lot of stocks in August this year after the run-up. I am currently 50% Cash - 50% stocks. Which is a very low stock position for me. I'll probably hold at least 50% stocks for the next 15 years or so.

The cash is sitting in a paltry money market fund. Maybe I'll find a better return after the first of the year, but no hurry right now.

 

[Mr._johngalt]

Hello! Re. holding your stock position for the "next 15
years or so", this says a lot about our respective
plans. I NEVER expect to be here 15 years from now, or
even 5 years from now for that matter. Changes your whole view of life and how you live it. Just today I was
chatting with a young man whose mother just died last week.
I think she was in her 40s. If that won't make you
"do it now", I don't know what will.

 

[Mr._johngalt]

Cut Throat...................hope the fine wine continues to flow for you. Live long and prosper!

 

[unclemick]

Most of the 'advice' I've seen on the net and elsewhere say's come short on bond maturity, build cash, - gut it out and wait for interest rates to go back up - al-la 1994.

I still keep Ben Graham's The Intelligent Investor handy and reread parts often so 50% stocks is my defensive 'mental' centerpoint starting place when looking at asset allocation

Meanwhile I'm leaning(not buying yet) toward real estate related(not building stocks) funds, REIT's, stocks - mainly because of Richard Young's Investor's Intelligence - that and MoneyPaper are my last remaining newsletters. I use to also get AAII and Utility Forcaster in the 90's.

 

[ats5g]

I wonder if you guys have considered the opportunity costs to holding a lot of money in cash (depending on what that is - MM?) versus say laddering 5 year CD's or 5 year treasury bonds. you know, cover all the bases. If interest rates go up, you can still take advantage a little if you use a ladder. If interest rates go down or stay the same, you won't be hurt much. I wouldn't just assume that interest rates are going to go up. They could also stay the same or go up just a little.

I certainly wouldn't go long though.

- Alec

 

[ats5g]

Sorry. I meant foregone interest from holding cash in, say, low interest bearing accounts like MM and savings accounts rather than using things like I bonds, EE bonds, CD's, etc., which are just as "safe".

If I was getting a 3-4% real guaranteed return, I sure as heck wouldn't move that money.

Alec

 

[Mr._johngalt]

Here is where we are currently:

Cash (bank money market) 10%
Investment grade bonds 15%
Aggressive bond fund 15%
Borderline (junk) bonds 20%
Real Estate 40%

At present, I do not expect this will change
significantly over the next few years. Some of this
stuff is callable, but absent that happening I don't
see much shifting around. If I had some cash now that
needed a home, I would probably go with CDs.

 

[Cut-Throat]

I wonder if you guys have considered the opportunity costs to holding a lot of money in cash (depending on what that is - MM?) versus say laddering 5 year CD's or 5 year treasury bonds. you know, cover all the bases. If interest rates go up, you can still take advantage a little if you use a ladder. If interest rates go down or stay the same, you won't be hurt much. I wouldn't just assume that interest rates are going to go up. They could also stay the same or go up just a little.

I certainly wouldn't go long though.

- Alec

The cash position is not long term. It is merely a parking position until I develop a strategy. The first strategy was taking some profits in the run-ups of stocks. which was a couple months ago.

Laddering, CD's, TIPS, I-bonds, Savings Bonds are all something I'm considering. Of course if stocks should plunge 40% in the next few months, I'd be interested in them

Cash   50%
Stocks 50%


I Don't  count real estate or pensions.
Although Real Estate is equal to  the Liquid portfoilo.

 

[unclemick]

I got the memo on 15% tax on dividends which will gradually put a drag on stock prices going forward - IMHO.

 

[haha]

I got the memo on 15% tax on dividends which will gradually put a drag on stock prices going forward - IMHO.

What does this comment refer to?

Mikey

 

[LA_Newsboy]

Question for Cut-Throat: I was interested in your mention of wintering in New Zealand a few posts ago. How about a few details on life down there, and how you have worked it out? Thanks, Dick

 

[unclemick]

Hey Mikey

My smart remark('memo') refers to the 'investment media' rediscovering dividends after a long absence since the tax cut to 15%.

 

[Mr._johngalt]

It has really helped us to be able to limit income taxes
to 15%. I did not anticipate how significant this was.
When SS kicks in, the income tax (compared to my
"big spender" days) will be a huge plus, ER-wise.

 

[sgeeeee]

It has really helped us to be able to limit income taxes
to 15%.  I did not anticipate how significant this was.
When SS kicks in, the income tax (compared to my
"big spender" days) will be a huge plus, ER-wise.

Passing on one's share of the bill to future generations is a great deal, provided we don't outlive the problem we've created.

 

[John Galt]

Salaryguru, I have children and grandchildren. Even with my outsized ego I know I can't protect future
generations from stupidity in our government. The
ones to follow us will have to fend for themselves.
I don't like it but that's the way it is.

 

[unclemick]

My father's generation made out like bandits on SS given the worker/retiree ratio - I plan to take my SS in two years - to beat the baby boom crunch. You can't fight the demographic's(just ask a steel or auto retiree). Maybe Scot Burn's(other post) can keep them working to age 70 to help the math.

BTY - what's the yield on New Zealand investments - you see Aussie bond funds get recommended once in while - but I haven't read much about New Zealand.

Which brings me to the queation - has anybody been looking oversea's for yield?

 

[Ted]

It is a fundamental fact of economics that the real cost to future workers will be whatever we retirees consume in the future.  While I feel that government deficit spending is greater than optimum, this talk about "passing the costs to future generations" is basically economic nonsense, because deficit financing today won't necessarily affect the parameters that will determine the future distribution of wealth between future workers and future retirees.

There are two positive things that society can do to improve the future standard of living of both workers and retirees:
1.  Invest in capital now -- particularly in the "intellectual capital" of education for young people (and particularly in fields having real economic value, such as medicine or engineering as opposed to the history of Far Eastern art.)
2.  Develop policies that encourage people to keep working, particularly by utilizing their experience through flexible part-time work arrangements.

Also, there are also negative things that can be done:
1.  Discourage consumption by retired people.  The most subtle, yet effective way to do this is to inflate the currency so that their holdings of money and bonds are devalued.
2.  The most effective deterrent of all to consumption by retired people would be to euthanize them.

These are facts.  Which ones people prefer to implement are a question of values.  Personally, I prefer the positive approach.

 

[sgeeeee]

It is a fundamental fact of economics that the real cost to future workers will be whatever we retirees consume in the future.  While I feel that government deficit spending is greater than optimum, this talk about "passing the costs to future generations" is basically economic nonsense, because deficit financing today won't necessarily affect the parameters that will determine the future distribution of wealth between future workers and future retirees.

I'm not sure what economics book you are reading your fundamental facts from, but you should get a new one.

1) We are running up the worlds largets deficit.
2) We are granting tax breaks primarily to the ultra wealthy.

These two facts add up to the conclusion that the bills of today's government will be paid by the middle and lower classes of the future.

 

[Ted]

Re: Quest for yield versus safety

Far and away the biggest "bill" that will need to be paid by future workers will be that required to pay the social security benefits of future retirees, assuming that these benefits continue to be indexed for inflation.

In addition, future taxpayers will have a legal obligation to pay off the Treasury bonds that are being purchased today to finance today's federal deficit. (Those who purchase them forego current consumption and in the process free up resources for current use by the government.)

But the federal government in the future (in the interest of future taxpayers) could essentially cancel this debt by inflating the money supply -- as it did during the 1970's. There will be strong political pressure from future taxpayers to do so, mainly because the total burden on them to support a growing retired population will be so great, as the result of demographic trends that have nothing to do with the federal deficit.

To say that middle and lower income people are the only ones who bear the tax burden now, or will in the future, is populist nonsense. I think that people with higher incomes should pay taxes at a higher rate, and in fact they do. While I didn't support the recent cuts in upper level tax rates, it is more populist doubletalk to label it as a "gift to the rich" when the government periodically decides to take less from them, but still taxes them at a substantially higher rate than others.

 

[unclemick]

Anyone care to speculate on future effects of the 15% div. tax rate, TIPs, I bonds on yield or for that matter the risk premium. ? are we headed back to pre 1958 where stock div. yields will beat bonds.

Bertstein(Efficient Frontier website) has struggled with TIPs and portfolio policy.

 

[Ted]

My guess is that the P/E ratio of stocks in the future will tend to decline towards where it was in the past. While I don't expect stock prices to decline, I think that the growth rate will be suppressed by interest rates rising, making bonds relatively more attractive, and by the "supply" of stocks relative to the "demand" for stocks increasing as a growing retired population liquidates its stock holdings to finance its costs of living in retirement.

This is one of the financial mechanisms through which the real cost of supporting non-working retirees will be borne by future workers, i.e., their investments won't deliver as high a rate of return to them.

 

[John Galt]

Hello Ted. My broker has been trying to get me to
invest in a "balanced fund'. (some stock, some bonds, etc) I have decided to "stay the course" and avoid all stocks. He has opined that I have "hurt myself" by
staying away from stocks for all these years. I don't care. What I value is predictability. Stocks don't offer it.
'Nuff said!

John Galt

 

[unclemick]

My MSN news recently posted an artilce on 'leveraged muni bond funds' - 'not for the long haul' which strikes me as trying too hard for yield and probably violates my sense of safety at least for 'this ER'. They quote Bill Gross who has 'guru' status at least in this market cycle. The nimble and asute may do o.k. but I fear a lot of people may misunderstand the leverage/interest cycle and get burned.