Moving to active in current market?

[BeachOrCity]

So I have been having thoughts in the last year, that a normal conservative AA of 50/50 or 70/30 is no longer appropriate when it is clear we will have negative real rates for many years to come.... and passive strategies around equities at current valuations could lead to a "lost decade' type of situation.

I view (in USA) both bonds and equities are largely over valued, and have switched from passive to active, where I can see more value and manage risk by looking at cash flows etc of individual equities or debt offerings.

Is anyone else changing their strategy because they feel the passive train is running out of steam and switching to active? Is anyone moving to more equities because they feel real yields will stay negative?

 

[pjigar]

History is longer than my investing lifetime. And history shows that the markets have overcome unthinkable calamities (financial or otherwise) so I keep the faith in history and sleep on. YMMV.

Disclaimer: Past performance is not a guarantee of future performance.

 

[corn18]

it is clear we will have negative real rates for many years to come....

What are you basing this on? It isn't clear to me.

 

[BeachOrCity]

What are you basing this on? It isn't clear to me.

The fed has signaled what inflation they will allow (over 2% without being specific) and they have signaled that they will not allow Short / Medium bond yield to go over inflation (via QE practices). They talk of taper but that will only actually occur and continue if rates don't rise, so taper will not actually completely get done (may start but won't finish and they certainly won't be rolling the debt back off the balance sheet). Basically we are in QE "forever", with the amount of QE variable.

(Plus our Gov't CANNOT afford to pay its debts if they have to pay 3% on the money)....so basically unless the Fed gets inflation back to 1-1.5% REAL rates are negative.

Same situation w/ corp debt. Same situation in europe / japan.

There simply is no where to go for yield when all the major's are playing this game.

 

[corn18]

I don't see anything unusual here.

 

[audreyh1]

Uh, no.

Rebalance as needed.

 

[Montecfo]

I'm already active. Just positioning for higher rates and avoiding duration on the bond side.

I do not believe I need a huge or even positive real return for my fixed income holdings to make aense. My primary objective is capital preservation, then income.

And it is easy to assume current market conditions will continue forever. Most people assume that. But they won't. Understanding that puts you way ahead.

 

[38Chevy454]

I'll take my chances and stay invested in the market with a fairly high percentage equities. I don't see any really good fixed income side options, but then you have to tell yourself that the fixed income side is for ballast. It is not intended for the higher returns. Higher returns are what the equity side is for. With the expected poor fixed returns (I agree with OP), I am willing to run higher equities in my AA. I am probably running currently about 15% higher equities over target AA.


Now if you think, or fear, that an index fund will be bad and you want to go with individual stocks that meet your criteria that is a decision you can make. I will stay with most of my savings in index funds, and then have my play account where I do active individual investing. In the end the index funds do the heavy lifting. My individual stocks satisfy my fun and trying to beat the market overall returns.

 

[VanWinkle]

I am still a long term investor as I am supposed to have 15-18 years of life left. I am not smart enough to pick the right stock, or time when to increase equities because fixed income is not earning enough. There are few that can do that, and maybe you are one of them. Good luck and I wish I could join the fun but the history supports indexing with a majority of investments.

VW

 

[pjigar]

And it is easy to assume current market conditions will continue forever. Most people assume that. But they won't. Understanding that puts you way ahead.

Most people here knows and accepts that markets go up and they go down. The problem is no one knows *when* markets go down and hence no one can benefit financially from it, all things being equal.

 

[Montecfo]

Most people here knows and accepts that markets go up and they go down. The problem is no one knows *when* markets go down and hence no one can benefit financially from it, all things being equal.

As an active investor i can buy where and when I see value, and I do. And I sell when an objective is reached.

Thus I do think you can benefit financially from market declines without worrying about timing.

But the point I was making was simply that current market conditions, including interest rates, are not static. Assuming they will remain static is probably a mistake.

 

[Closet_Gamer]

I've posted in other threads that I think current bond yields are a real problem and likely create negative real returns in the portfolio for some time (or you're hoping for the greater fool theory and get to sell them for more during a rebalancing activity).

Ironically, though, if rates do go up that's when the real damage could occur as every asset class in the world re-prices to accommodate the yields available on lower risk assets. That's what really scares me.

All that said, I don't think I have an information or other advantage over the market that let's me make smarter decisions in securities selection, so I continue to pursue my AA built on index funds approach.

 

[pb4uski]

So I have been having thoughts in the last year, that a normal conservative AA of 50/50 or 70/30 is no longer appropriate when it is clear we will have negative real rates for many years to come.... and passive strategies around equities at current valuations could lead to a "lost decade' type of situation.

I view (in USA) both bonds and equities are largely over valued, and have switched from passive to active, where I can see more value and manage risk by looking at cash flows etc of individual equities or debt offerings.

Is anyone else changing their strategy because they feel the passive train is running out of steam and switching to active? Is anyone moving to more equities because they feel real yields will stay negative?

I have similar concerns. I was concerned that equities were overpriced even before the covid crash so I'm in capital preservation mode and focusing on investment grade preferred stock because most other fixed income yields (CDs, bonds, etc) are so pathetic.

 

[gayl]

I am still a long term investor as I am supposed to have 15-18 years of life left. I am not smart enough to pick the right stock, or time when to increase equities because fixed income is not earning enough. There are few that can do that, and maybe you are one of them. Good luck and I wish I could join the fun but the history supports indexing with a majority of investments.



VW

+100%

 

[Out-to-Lunch]

If I am not mistaken, this question should be posted in the "Fire and Money" forum given the new rules: https://www.early-retirement.org/forums/f44/refocusing-the-forum-read-before-posting-110405.html

...we ask that debating... investment approaches be limited to FIRE and Money.

“FIRE and Money” is the forum to ... debate financial topics such as... active vs passive and index investing

 

[Markola]

No, not changing my entire investing philosophy due to fears of stuff that may or may not happen. I buy the world according to Vanguard’s advice and then sit tight. I would not be surprised if international stocks assume market leadership for a period of years at some point, as history shows happens every several years.

 

[BeachOrCity]

No, not changing my entire investing philosophy due to fears of stuff that may or may not happen. I buy the world according to Vanguard’s advice and then sit tight. I would not be surprised if international stocks assume market leadership for a period of years at some point, as history shows happens every several years.

Ironic that my only indexed equities left are indeed the international stuff, because I believe that is still in a range with valuations that make some sense. All my domestic is individual equities.

 

[jollystomper]

Is anyone else changing their strategy because they feel the passive train is running out of steam and switching to active? Is anyone moving to more equities because they feel real yields will stay negative?

Probably not. While it is nice to be in a position to take more risk to achieve more gains, I am fine with what I have. The risks I took earlier in life produced results that are supporting me now in later life. Now is a time to relax and enjoy .

 

[BeachOrCity]

Thanks for all the comments and thoughts folks.