Fixed Income Continues to be "Highly Valued"

[audreyh1]

Fixed Income Continues to be "Highly Valued", and all indications are that this situation may persist for several more years.

In spite of all the warnings, etc., about imminently rising interest rates, fixed income asset classes continue to rise in value and the 10-year treasury recently burst through it's all time low from 1946. At 1.64%, it's still darn low historically.

According to folks who monitor future rate predictions, any tightening will be deferred until April 2015. This date has continued to move out over the past couple of years. Forward Rate Predictions: Radical Change - Morningstar

So what to do about fixed income asset classes that continue to be so "highly valued"? Well, I recently realized that I just don't have to worry about it. If that's the higher value section of my portfolio at the moment, that's the asset class I'll be spending down as I withdraw (per my AA). If the low-interest-rate situation continues to persist for several years, then I'll naturally continue to withdraw from this "appreciated" asset class. Eventually when things change and interest rates rise, and at least I will have "enjoyed" the fruits of the past situation, and perhaps some of my other asset classes will have a chance in the limelight.

Just another way to look at maintaining a balanced AA. Not only does it force you to "sell high" and "buy low" when you rebalance, but it also has you drawing down from the most appreciated asset classes. So when they inevitably turn (which can take a LOOOOONG time), you've already enjoyed some benefits.

Audrey

 

[ejman]

Yes, a mechanical approach to AA makes it easy to buy low sell high. This is my approach as well. The only fly in the ointment that worries me is if changes happen so quickly that adjusting AA becomes an exercise in catching a falling knife. My hope is that the Federal reserve actually does as it says it will do.

 

[audreyh1]

Yes, a mechanical approach to AA makes it easy to buy low sell high. This is my approach as well. The only fly in the ointment that worries me is if changes happen so quickly that adjusting AA becomes an exercise in catching a falling knife. My hope is that the Federal reserve actually does as it says it will do.

I think you mean rebalancing? As opposed to adjusting (changing) your AA.

I don't worry too much about the "catching a falling knife" part. Actually, a sudden sharp, permanent correction is the easiest to deal with in rebalancing, but they rarely happen that way. Usually it's a long grind down, or up, with lots of sideways action, and an occasional V bottom or spike that happens too quick to catch (and since they are so short - don't matter anyway accept they scare/excite the heck out of everyone).

1. It's a good idea not to rebalance too often - either limit yourself to no more than once a year, or use wide triggers so that things go well out of balance before rebalancing.

2. I don't worry too much if an asset class keeps going down after rebalancing into it. Eventually (you never know when), the asset class will reverse, and it's OK if you bought more of it over several years. It's kind of like averaging in - no big deal really.

Audrey

 

[Nords]

Fixed Income Continues to be "Highly Valued", and all indications are that this situation may persist for several more years.
In spite of all the warnings, etc., about imminently rising interest rates, fixed income asset classes continue to rise in value and the 10-year treasury recently burst through it's all time low from 1946. At 1.64%, it's still darn low historically.

We only keep enough cash in hand for a couple years' expenses anyway, so low interest rates don't exactly break the bank.

I think the real benefit of cash isn't its yield-- it's being able to negotiate a cash discount.

 

[ejman]

I think you mean rebalancing? As opposed to adjusting (changing) your AA.

I don't worry too much about the "catching a falling knife" part. Actually, a sudden sharp, permanent correction is the easiest to deal with in rebalancing, but they rarely happen that way. Usually it's a long grind down, or up, with lots of sideways action, and an occasional V bottom or spike that happens too quick to catch (and since they are so short - don't matter anyway accept they scare/excite the heck out of everyone).

1. It's a good idea not to rebalance too often - either limit yourself to no more than once a year, or use wide triggers so that things go well out of balance before rebalancing.

2. I don't worry too much if an asset class keeps going down after rebalancing into it. Eventually (you never know when), the asset class will reverse, and it's OK if you bought more of it over several years. It's kind of like averaging in - no big deal really.

Audrey

Sorry for stating my meaning poorly (I'm a master at that) yes I did not mean adjusting your AA - I meant responding to market changes so as to adjust to your AA back to your standard levels.

I fully agree with not rebalancing too often. From a gut level standpoint that's why I have wide 10% bands although I don't recall reading any theoretical justification for this - it just feels right.

As to the "catch a falling knife" analogy- My experience has been that most of the time in the investing world nothing much happens and you might as well go to sleep but some times - very rarely - things do happen October 1987 and March 2009 come to mind and then - it does matter if one is able to respond to that moment.

 

[audreyh1]

I think the real benefit of cash isn't its yield-- it's being able to negotiate a cash discount.

I think the real benefit of cash is having it to spend . But, yes, I don't worry whether my short-term cash is yielding anything either as I intend to spend it soon.

By fixed income I mostly meant bonds (as well as cash). However, some people whose annual income needs are mostly covered by pensions don't bother with a large chunk of bonds in their AA. Makes perfect sense. The rest of us retires without pensions or SS, however, usually do need a good slug of bonds to weather market volatility and be able to rebalance as different asset classes come into favor. And/or to draw on in the event of several years of poor equity performance.

 

[audreyh1]

As to the "catch a falling knife" analogy- My experience has been that most of the time in the investing world nothing much happens and you might as well go to sleep but some times - very rarely - things do happen October 1987 and March 2009 come to mind and then - it does matter if one is able to respond to that moment.

Yep, having rebalanced several times (caught a falling knife) while markets dropped in 2008-09 made me widen my triggers. I also ended up with 10% as my band - that was 2x what it had been. It's actually 8% to 10% - 8% being "enough" to rebalance if I want, and 10% being MUST rebalance even if I feel reluctant (scared). Empirically determined to be "practical" - no theory behind it. In practise though, it does limit the frequency of rebalancing.

 

[Nords]

By fixed income I mostly meant bonds (as well as cash). However, some people whose annual income needs are mostly covered by pensions don't bother with a large chunk of bonds in their AA. Makes perfect sense. The rest of us retires without pensions or SS, however, usually do need a good slug of bonds to weather market volatility and be able to rebalance as different asset classes come into favor. And/or to draw on in the event of several years of poor equity performance.

I've always wondered whether bonds make sense in a portfolio that could have a portion of it allocated to an annuity instead. Annuities used to be overpriced and overcomplicated, but a SPIA seems reasonably priced these days alongside bond yields.

 

[audreyh1]

I'm only 52, and I'm not willing to take on the inflexibility of an SPIA, even if inflation adjusted. And I don't intend to try to live off bond yields either, so the relative "yield" compared to an SPIA doesn't matter to me. I don't use bonds to generate income.

I'll start evaluating my options at 65+ . I doubt I'd really buy any such thing before 70 or 75.

The buzz these days is the SPIAs are currently a "bad deal" due to low interest rates. I shudder at the thought of buying anything where I have to worry about the state of an insurance company beyond 20 years.

 

[Nords]

I'm only 52, and I'm not willing to take on the inflexibility of an SPIA, even if inflation adjusted. And I don't intend to try to live off bond yields either, so the relative "yield" compared to an SPIA doesn't matter to me. I don't use bonds to generate income.
I'll start evaluating my options at 65+ . I doubt I'd really buy any such thing before 70 or 75.
The buzz these days is the SPIAs are currently a "bad deal" due to low interest rates. I shudder at the thought of buying anything where I have to worry about the state of an insurance company beyond 20 years.

Well, you're a cut or two above the "average" investor. Most would benefit from an illiquid annuity preventing stupid behavior with that part of their portfolio.

I like the "retire now, annuitize later if necessary" approach because the portfolio success rate probably plays out to render an annuity unnecessary.

Looking across the market asset classes, I can understand why the "Nowhere to run, nowhere to hide" crowd is attracted to dividend-paying stocks...

 

[Gone4Good]

Took advantage of the low-cost put option in retail CD's a few years ago when CD rates were significantly higher than treasuries. For the next three years or so, I don't really care what rates do.

 

[FIREd]

Took advantage of the low-cost put option in retail CD's a few years ago when CD rates were significantly higher than treasuries. For the next three years or so, I don't really care what rates do.

Same here, though I locked in longer maturities. In addition to CDs, I have some bond funds held in retirement accounts. Since I can't touch these accounts for another 20+ years, I am not too worried about an increase in interests rates. I will continue to reinvest the interests, and higher interest rates simply mean higher income reinvested at lower prices. I think it'll work out just fine.

 

[audreyh1]

Looking across the market asset classes, I can understand why the "Nowhere to run, nowhere to hide" crowd is attracted to dividend-paying stocks...

Yeah with the 10-year treasury yield dropping below the S&P500 yield, I can see looking at dividend paying stocks in a whole new light!

As of 6/8/12 S&P500 dividend yield is 2.06%, 10-year treasury 1.64%

from https://www.aamlive.com/blog/201205...urozone-woes-and-disappointing-us-growth-data

Looking at a longer term picture, you can see that it looks like we've completed a huge cycle that started in the early 50's!

\

from A 'New Normal' For Dividend Yields - Or Temporary Distortion? - Seeking Alpha

The S&P500 Dividend Yield, which bottomed around 1.11% in Aug 2000, has been increasing over the past 12 years.

from S&P 500 Dividend Yield

 

[audreyh1]

Good for you folks locking in the "higher rates" (which didn't actually look like "higher rates" at the time)!

 

[Nords]

The S&P500 Dividend Yield, which bottomed around 1.11% in Aug 2000, has been increasing over the past 12 years.

Funny how that bottoming coincided with the addition of high-growth no-dividend tech stocks to the S&P500.

I can't tell whether today's S&P500 has any correlation to the S&P500 of 10 years ago, let alone 50 years ago. But I think companies have decided that dividends are more popular than share buybacks, so that's what they'll do.

I wonder if dividends are going to move into bubble territory over the next 5-10 years, or if their return to taxing as "ordinary income" will keep the dividend trend in check.

 

[audreyh1]

Retail investors have been pulling their money out of the stock market in droves since 2008 and piling into bonds. This coupled with international financial freakouts is contributing to the low treasury rates among other things. Investors are madly chasing bond yield and all indications are that the phenomenon continues.

At the same time the S&P500 P/E ratio keeps dropping. At 15.25 it's still considered at least fully valued, but it's way lower than the 40+ levels of the early 2000s.

In short, I don't think enough investors are "piling into" dividend stocks for the desired income to make the stocks rise that much. Far more investors are running away from ALL stocks. Maybe if the dividend yield keeps rising and gets closer to the 3% that was enjoyed for long periods investors will stop running away, but I figure it would still take many years for the investor appetite to change.

I think stocks will have to keep having good dividends to "compete" with bonds, given the current investor fears - kind of like they did in the late 70s.

Also, that drop from 3% to almost 1% occurred over the decade of 1990-2000. So far, dividends only have taken 12 years to increase to 2%, so it might take another decade!

 

[Nords]

In short, I don't think enough investors are "piling into" dividend stocks for the desired income to make the stocks rise that much. Far more investors are running away from ALL stocks. Maybe if the dividend yield keeps rising and gets closer to the 3% that was enjoyed for long periods investors will stop running away, but I figure it would still take many years for the investor appetite to change.
I think stocks will have to keep having good dividends to "compete" with bonds, given the current investor fears - kind of like they did in the late 70s.
Also, that drop from 3% to almost 1% occurred over the decade of 1990-2000. So far, dividends only have taken 12 years to increase to 2%, so it might take another decade!

Your data is more convincing; I'm basing mine on the number of articles I see on dividend investing in the financial press. The dividend ETF DVY used to only get mentioned once or twice a year, and now it pops up in my feed almost weekly.

 

[obgyn65]

This is also my belief. As mentioned in other threads, I have started to invest in deferred annuities this year.

I've always wondered whether bonds make sense in a portfolio that could have a portion of it allocated to an annuity instead.