What Fixed Rate Would Get You Out of Stocks?

[RenoJay]

Generally the retort I hear when I mention that the stock market is over valued currently is that the alternative (bonds) are even more overvalued. So, let’s pretend there’s a theoretical payment vehicle that pays fixed rate monthly interest, does not lose principal value, and has a very high likelihood of making all the promises payments. (Such as a CD but with no FDIC limits.).

What interest rate and length of contract (1 year, 5 years, 30 years?) would you need to get in order to choose to decrease your current stock allocation by 10 percentage points (i.e. from 60% equity down to 50%, etc.)

 

[DrRoy]

Maybe 5-6%.

 

[LuckyDog]

I would run away from stocks for 6%

 

[street]

I would love to see 4% plus and I would be moving some funds.

 

[audreyh1]

I don't know know - it's all relative. If short-term CDs (say 2 year or less) got to 4%, either the stock market is already down OR inflation just took a nasty jump, or both.

I'll just rebalance. I do use CDs for bond substitutes some when they give better risk/reward - if they are yielding same as the equivalent maturity.

 

[RenoJay]

Thanks for the responses. The origin of the post is that I'm considering changing my AA. I'm about 50% equities currently, but am considering going down to 40%, and taking the tax hit since I have a lot of gains and it's a non-retirement account. I have access to "hard money lending" opportunities that, although far from the completely safe scenario I described in the original post, are actually fairly safe because there's at least 70%+ equity in each property I loan against, and the interest rates tend to be in the 7.5% - 10% range. So I was hoping to get people's gut take on what "safe rate" would get them out of stocks, and it sounds like the consensus is ~5%.

 

[foxfirev5]

After living through the double digit rates of the early 80's nominal rates don't mean too much. A guaranteed real rate of 1-2% would get my attention. However, I would probably never abandon equities completely in any case.

 

[brewer12345]

3 to 4% on 10+ year TIPS would have me liquidating a LOT of equities.

 

[kcowan]

I would probably need 8% to beat my equity performance. But another swoon that was not a 2 year dip would change my mind.

 

[RenoJay]

I would probably need 8% to beat my equity performance. But another swoon that was not a 2 year dip would change my mind.

Question: Would getting a fixed monthly payment and feeling your principal was "safe" make you change the criteria? (i.e. insteading of "beating" your equity performance, you'd be willing to underperform it in favor of the benefits outlined?)

 

[CoolChange]

3% to 4% Real Return

3 to 4% on 10+ year TIPS would have me liquidating a LOT of equities.

Me2!

 

[jim584672]

I remember earning 4%-5% with hardly any risk. Those were the days.

 

[gayl]

Rate of inflation + 4% & the ability to get out of investment for $4.95 w/o penalty when I wanted ..... oh, that's an ETF

 

[Jerry1]

Rate of inflation + 4% & the ability to get out of investment for $4.95 w/o penalty when I wanted ..... oh, that's an ETF

+1 --> Have to beat inflation.

 

[JJpop]

Mostly fixed right now and just retired.Earning about 3.5 pct,mostly IRA accounts with some muni’s and Ibonds.Will add some stocks when the next big dip occurs.Waiting patiently,but am fine 98 pct stock free.

 

[kcowan]

Question: Would getting a fixed monthly payment and feeling your principal was "safe" make you change the criteria? (i.e. insteading of "beating" your equity performance, you'd be willing to underperform it in favor of the benefits outlined?)

I should mention that we receive 5 pensions including medical, dental and drugs so my investment approach is much more aggressive. It is to pay for luxuries, charities and inheritances. We are also starting to receive annual payouts from our retirement investment accounts.

 

[VFK57]

I would go for 4% or higher.

 

[pc95]

Definitely 4%, even ~3.5%+

Not retired yet, but I did luckily get into a 10 yr CD at 5% in 2011. Aggravating, all the "reasoning" to hold rates below 3%. Still have a big chunk in stocks and hold on to the lap-bar.

 

[Curmudgeon]

4% + inflation.

And, since I will never know what "+ inflation" means a few years out, there is NO fixed, long-term rate that will suffice.

 

[jazz4cash]

Definitely 4%, even ~3.5%+

Not retired yet, but I did luckily get into a 10 yr CD at 5% in 2011. Aggravating, all the "reasoning" to hold rates below 3%. Still have a big chunk in stocks and hold on to the lap-bar.

Penfed?

 

[pc95]

Yes, Penfed whose rates sadly are now fairly pedestrian.

 

[mrfeh]

Maybe 5-6%.

+1

 

[Danmar]

Question: Would getting a fixed monthly payment and feeling your principal was "safe" make you change the criteria? (i.e. insteading of "beating" your equity performance, you'd be willing to underperform it in favor of the benefits outlined?)

I get where you are coming from, but in my case, probably not. My portfolio has out performed the appropriate benchmark (TSX) by a wide margin for a long time. The divs from the portfolio are very safe and weren’t cut in the financial crises. Accordingly, I would need something in double digits to overcome the tax differences between divs/cap gains and interest. My portfolio has returned double digit total returns for all relevant periods.

I have a lot of confidence in my portfolio(rightly or wrongly) coupled with a high risk appetite. Also, I have a very generous pension as a backstop. So everyone is different.

 

[Scuba]

Thanks for the responses. The origin of the post is that I'm considering changing my AA. I'm about 50% equities currently, but am considering going down to 40%, and taking the tax hit since I have a lot of gains and it's a non-retirement account. I have access to "hard money lending" opportunities that, although far from the completely safe scenario I described in the original post, are actually fairly safe because there's at least 70%+ equity in each property I loan against, and the interest rates tend to be in the 7.5% - 10% range. So I was hoping to get people's gut take on what "safe rate" would get them out of stocks, and it sounds like the consensus is ~5%.

I agree with Audrey's comment that it's all relative. High rates on their own don't mean you're beating inflation. I am also a fan of hard money lending but currently have limited that to 20-25% of our portfolio. Might consider going up to 30-40%. Since I will also have a pension and SS, I prefer to keep at least 70% of our remaining portfolio in equities.

 

[kcowan]

One thing about higher rates is it would go a long way towards covering the DB Pension Plan deficits!