Annual interview with Seeking Alpha-positioning for 2013

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Annual interview with Seeking Alpha-positioning for 2013

Postby larryswedroe » Tue Dec 25, 2012 10:41 am

http://seekingalpha.com/article/1081411-larry-swedroe-positions-for-2013-resist-the-temptation-to-stretch-for-yield

Mine is the fourth in their series, so if you are interested you can check the others

Hope you find it of interest
Larry
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Re: Annual interview with Seeking Alpha-positioning for 2013

Postby umfundi » Tue Dec 25, 2012 1:27 pm

Larry,

Very informative, thank you.

Keith
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Re: Annual interview with Seeking Alpha-positioning for 2013

Postby Average Investor » Tue Dec 25, 2012 1:40 pm

Great article, thanks!

If I am understanding the point of the article correctly I may need to reconsider my position in Vanguard Interm-Term Investment-Grade, http://quote.morningstar.com/fund/f.aspx?t=VFIDX

Happy Holidays.
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Re: Annual interview with Seeking Alpha-positioning for 2013

Postby livesoft » Tue Dec 25, 2012 1:47 pm

I really liked this as well, but then again I really like Mr. Swedroe's books immensely. Folks should read this interview/article.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Annual interview with Seeking Alpha-positioning for 2013

Postby peppers » Tue Dec 25, 2012 2:45 pm

Good read. Thank you for the link.
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Re: Annual interview with Seeking Alpha-positioning for 2013

Postby larryswedroe » Tue Dec 25, 2012 3:36 pm

Livesoft
Glad you have enjoyed my books. Suggest you check out my new one, including review by Mel Lindauer. http://www.amazon.com/Think-Invest-Like-Warren-Buffett/dp/0071809953/ref=sr_1_6?s=books&ie=UTF8&qid=1354543961&sr=1-6

Average investor
While I don't recommend that fund, there are far worse "mistakes" one can make. I would just make sure that you consider say 15-20% as equity like risk. The other thing is that there is more call risk here than if you hold the shorter term fund (and of course credit risk increases with term). Unfortunately no real good choices in FI right now with CDs being often the best choice.

Best wishes
Larry
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Re: Annual interview with Seeking Alpha-positioning for 2013

Postby Munir » Tue Dec 25, 2012 5:34 pm

larryswedroe wrote:Livesoft
Glad you have enjoyed my books. Suggest you check out my new one, including review by Mel Lindauer. http://www.amazon.com/Think-Invest-Like-Warren-Buffett/dp/0071809953/ref=sr_1_6?s=books&ie=UTF8&qid=1354543961&sr=1-6

Average investor
While I don't recommend that fund, there are far worse "mistakes" one can make. I would just make sure that you consider say 15-20% as equity like risk. The other thing is that there is more call risk here than if you hold the shorter term fund (and of course credit risk increases with term). Unfortunately no real good choices in FI right now with CDs being often the best choice.

Best wishes
Larry


For whatever it's worth, 10% of bonds in the Vanguard Intermediate Investment Grade Bond fund are callable according to a Vanguard Flagship staffer.
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Re: Annual interview with Seeking Alpha-positioning for 2013

Postby BlueEars » Tue Dec 25, 2012 5:56 pm

Larry, I noticed this in your article:
The reason is that investors chasing the latest fad cause valuations to rise. And the evidence is clear that the best predictor of future returns is a valuation metric such as the P/E ratio. REITs for example are now trading at a P/E of about 40. The Alerian MLP Index has a P/E of about 24. Those kinds of valuations have generally turned out very badly for investors.


What is the context for your comment that PE = 40 is high for REITs? What has been the historical average?

Just curious, I don't own a REIT fund. Vanguard's VGSIX has PE = 61.7 now.
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Re: Annual interview with Seeking Alpha-positioning for 2013

Postby zzcooper123 » Tue Dec 25, 2012 6:06 pm

Excellent article. Thank you, Larry!
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Re: Annual interview with Seeking Alpha-positioning for 2013

Postby larryswedroe » Tue Dec 25, 2012 7:11 pm

Blueears
Actually with REITS P/E is not the preferred metric. Industry gold standard is FFO or funds from operation. Unfortunately M* doesn't show that. But for REITS its currently about 18 which is high. Easy to see that also in the very low dividend yield. Historically REITs have negative real growth of earnings of about 1.5% a year. So subtract that from current yield and that doesn't look like very attractive return to an equity asset class. Real of about 2%. Using M* you can look at P/CF which if memory serves is about 16-17. That's also high. I don't know the historical average but have asked about that and will let you know if I find out.
The bottom line IMO is that all higher yield strategies are now what could be called "crowded trades" and that means future expected returns are low(er). Also that chasing yield means IMO that the assets are now in weaker hands, investors more likely to panic and sell when the strategy doesn't appear to be working. If going to time the market at all you want to buy when valuations are low and the only people left holding the assets are strong hands (like Buffett).
Hope that is helpful
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Re: Annual interview with Seeking Alpha-positioning for 2013

Postby BlueEars » Tue Dec 25, 2012 7:27 pm

Larry, thanks that was an interesting reply.
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Re: Annual interview with Seeking Alpha-positioning for 2013

Postby larryswedroe » Tue Dec 25, 2012 10:28 pm

Les, very welcome

Yes whatever becomes popular tends to get crowded and even if it's a risk story, the risk premium will shrink if not disappear. Right now all higher yield strategies look that way to me. Making them more dangerous than before. For example I think I read that now is the first time on record that high yield now has lower yield than E/p ratio. That sure sounds like a crowded trade to me.

Best wishes
Larry
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Re: Annual interview with Seeking Alpha-positioning for 2013

Postby Average Investor » Wed Dec 26, 2012 1:34 pm

larryswedroe wrote:Average investor
While I don't recommend that fund, there are far worse "mistakes" one can make. I would just make sure that you consider say 15-20% as equity like risk. The other thing is that there is more call risk here than if you hold the shorter term fund (and of course credit risk increases with term). Unfortunately no real good choices in FI right now with CDs being often the best choice.


Thanks Larry, appreciate the feedback and guidance. This fund is less than 5% of my total portfolio. I am considering moving some of the fixed income assets into CDs as suggested, unfortunately all I have access to right now in this account are brokered CDs. Last I looked at the rates and terms on those they did not wow me.

Really enjoyed your book "The Only Guide to a Winning Investment Strategy You'll Ever Need," especially the chapter on assessing risk tolerance. I just picked up "Rational Investing in Irrational Times: How to Avoid the Costly Mistakes Even Smart People Make Today."

Thank you.
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Re: Annual interview with Seeking Alpha-positioning for 2013

Postby Beagler » Wed Dec 26, 2012 1:53 pm

My, what a broad brush is used to paint stocks that pay a dividend above the paltry yield of TSM. Back when the DJI paid a respectable dividend yield, that number might be considered by some as "high dividend yield," at least by more modern standards. With the aspersions cast upon dividend stocks, you'd think that Wellesley and Wellington funds would be setups for failure.
Last edited by Beagler on Thu Dec 27, 2012 12:26 pm, edited 2 times in total.
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Re: Annual interview with Seeking Alpha-positioning for 2013

Postby livesoft » Wed Dec 26, 2012 1:54 pm

I suspect that Wellesley and Wellington really get their dividends mostly from bonds.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Annual interview with Seeking Alpha-positioning for 2013

Postby Beagler » Wed Dec 26, 2012 2:12 pm

livesoft wrote:I suspect that Wellesley and Wellington really get their dividends mostly from bonds.


I suspect they derive their dividends from stocks, and their couponds from bonds. :D
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Re: Annual interview with Seeking Alpha-positioning for 2013

Postby Browser » Wed Dec 26, 2012 6:20 pm

When TIPS yields are high in absolute terms (relative to historical averages), we would increase our allocation to TIPS and reduce it to nominal bonds. And we would also consider extending maturities. When TIPS yields fall to below their historical averages the reverse would be true. The advantage of this strategy is that when TIPS yields rise to high levels, as they did in 2009, you can lock in those high real yields for a very long time (as much as 30 years) without taking inflation risk, and doing so might allow you to actually lower your equity allocation at the same time because your need to take risk has been reduced by the high yields you have locked in.

Larry - I wonder if you could clarify your remarks in the above quote where you refer to "locking in" high TIPS yields for a very long period of time. This has come up in other threads, in which I believe you have suggested that perhaps those TIPS bought back in 2009 (when rates were high) are perhaps a "sell" now that their real rates have become negative. The notion that high yields were "locked in" when these were purchased seems contradictory to the notion that perhaps they should be sold now (based on the idea that if one wouldn't buy them at current rates, then perhaps they shouldn't be held - which is the equivalent decision). I'm a little confused. If high rates were locked in, has the lock been picked or what? :confused
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Re: Annual interview with Seeking Alpha-positioning for 2013

Postby larryswedroe » Wed Dec 26, 2012 8:28 pm

Browser
You locked in those high yields for the remaining term when you bought them regardless of whether you hold to maturity or not. If you sell early all you have done is bring forward the gains, taking them as capital gains instead of income.
Best wishes
Larry
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Re: Annual interview with Seeking Alpha-positioning for 2013

Postby Browser » Wed Dec 26, 2012 9:13 pm

larryswedroe wrote:Browser
You locked in those high yields for the remaining term when you bought them regardless of whether you hold to maturity or not. If you sell early all you have done is bring forward the gains, taking them as capital gains instead of income.
Best wishes
Larry

So then, if my intent in buying was to provide an average annual real return of maybe 2% during the course of an 18-year TIPS ladder (as retirement income), those returns have been pushed forward in the form of capital gains, and from this point forward I can expect negative real returns by continuing to hold. Looking at it this way, does it make more sense to harvest those returns now, put the proceeds away into principal-protected CDs or ST bonds as a cash reserve, and await possible reinvestment opportunities in longer-maturity securities that might provide a better than negative real return down the line? Or just hold onto the things as per originally intended and act as if the capital gains didn't exist? I think a lot of people are struggling with this kind of decision these days.
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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Re: Annual interview with Seeking Alpha-positioning for 2013

Postby larryswedroe » Thu Dec 27, 2012 10:46 am

Browser
Yes you thinking is now correct. A mistake that most investors make is failing to "mark to market" individual bond holdings--they don't do that with mutual funds because their NAV is reported. But it doesn't change the facts.

As to which to do? If I had crystal ball I would tell you. I don't. As I wrote in my bond book and Right Financial Plan book I think there are two good approaches with TIPS. One is buy and hold and the other is shifting maturities based on the idea that if there is anything that has tendency to revert to mean in investing it's REAL interest rates. But there is no guarantee and you can be wrong for an awfully long time---which often causes people to confuse strategy and outcomes and abandon their plans and the worst thing to do is to be shifting between strategies.

Personally I have sold and bought TIPS several times and did quite well, including benefiting from shifting to longer maturities when yields rose to historic heights. When the real yields fell I first shortened maturities and then eventually started selling until when rates fell below 1.6% And I switched to ST high quality. And I knew, based on Japan that I could be "wrong" for long time. That was the risk, lost opportunity. And I certainly in hindsight was wrong.

If you understand the risks IMO I think the odds personally favor staying with high quality ST bonds like CDs now. And then be ready to shift to TIPS when real rates rise to closer to historic averages.
But don't do it unless you won't question yourself after the fact about whether it was right or not. It's like a good poker player who knows he can make the right move, say calling a bluff, and the other guy draws to an inside straight. The good player congratulates himself for making the right move and moves on. He knows you can play well and lose or play badly and win--because there is luck involved.


I hope that is helpful
Best wishes
Larry
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Re: Annual interview with Seeking Alpha-positioning for 2013

Postby Browser » Thu Dec 27, 2012 11:26 am

Many thanks for your detailed discussion of my question, Larry. It helps a lot in trying to frame the issues on this one.
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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Re: Annual interview with Seeking Alpha-positioning for 2013

Postby larryswedroe » Thu Dec 27, 2012 11:37 am

My pleasure Browser. Glad to be of help
The best investors are both informed and understand that they should not confuse strategy with outcome--either the decision is right or wrong before you know the outcome because we don't have clear crystal balls.
Best wishes
Larry
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Re: Annual interview with Seeking Alpha-positioning for 2013

Postby ResNullius » Thu Dec 27, 2012 12:05 pm

Larry, I only like to read articles that make common sense to my simple mind, and your article seemed to make great common sense. I do have a question, though. I have 100% of my bond allocation split between Vanguard's short and intermediate investment grade funds (not the index). My IRA is 100% fixed, while a much lesser amount of my taxable account is fixed. My overall allocation is around 60% fixed and 40% equity index funds with Vangaurd. I also have a chunk (about 5%) in cash, which I include when I say 60% of my portfolio is fixed. I'm 62 and fully retired due to health issues. Anyway, my question is whether you think my fixed allocation is reasonably invested? Should my intermediate be moved into short, for example? I don't think tax-exempt makes sense for me, but it's not a slam dunk either way. Thanks for the article, and thanks for any thoughts you might have on this.
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Evidence-based investing.

Postby Taylor Larimore » Thu Dec 27, 2012 12:31 pm

Larry:

You wrote:
None of the investment advice we give is based on our opinions. It’s all based on what we refer to as the “science of investing,” or what might be called evidence-based investing. For both stocks and bonds we adopt what is referred to as a passive approach

"Evidence-based" and "passive" investing is also the hallmark of Boglehead investing. Your books, articles and interviews have made you a recognized and leading investment authority. This forum is honored and appreciative of your continuing contributions.

Happy Holiday!
Taylor
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Re: Annual interview with Seeking Alpha-positioning for 2013

Postby larryswedroe » Thu Dec 27, 2012 1:12 pm

ResNullius
Glad you enjoyed the article.But it's impossible for me to make a judgment without knowing all of your situation. I can say that you should probably count say 15% of your bond allocation as equity like risk, so you don't underestimate the risks in your portfolio. My personal preference would be though to move to CDs (and longer is often okay if you get very low early redemption fee) and then take the equity risk on the equity side.
With yields where they I certainly wouldn't recommend going longer but you're allocation between short and intermediate is fine. My own is pretty similar. The curve has been steep and term risk has historically been best rewarded when it's steep. I'm sticking with my 5 year average ladder with my munis and own DFA ST extended credit fund (bit under 3 years) with taxables--waiting for TIPS yields to rise. My other recommendation, strong one, is to move to TIPS if and when real rates rise back to about historical averages.

I hope that is helpful

Taylor
Thanks very much for those very kind words. They are greatly appreciated. Makes the time spent worth the effort.

Best wishes
Larry
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Re: Annual interview with Seeking Alpha-positioning for 2013

Postby ResNullius » Thu Dec 27, 2012 1:36 pm

Larry, thanks for the comments and suggestions. I appreciate it.
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Re: Annual interview with Seeking Alpha-positioning for 2013

Postby Browser » Thu Dec 27, 2012 1:46 pm

Echoing Taylor's remarks - can't thank you enough Larry for tirelessly sharing your know-how with all of us. I've benefited considerably.
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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Re: Annual interview with Seeking Alpha-positioning for 2013

Postby garlandwhizzer » Thu Dec 27, 2012 2:02 pm

Excellent post, Larry, and also very insightful comments on the current overcrowding in high yield strategies and their potential vulnerability going forward. It's a privilege to be able to sample in this forum the wisdom, research, and experience of seasoned and astute experts like you and Rick.

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