Fed pumping and safety net

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Fed pumping and safety net

Postby Bob Adams » Fri Apr 05, 2013 3:36 pm

It seems to me that the only real game in town right now is equities unless you are happy with mid to low single digit returns. When the money pumping stops and interest rates climb then equities and bonds will get slaughtered. I'm heavy in equities 80/20 and would like some insurance that bonds won't be able to offer. I'm thinking puts on the SP 500 and have a floor that I can pull up behind me. BTW I am 64 and don't want to go through another 2008 without insurance. That's my take but I've only lately gotten interested in investing. Am I on the right track? Other ideas?
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Re: Fed pumping and safety net

Postby NateH » Fri Apr 05, 2013 3:43 pm

I read that the vast majority of investors age 64 and 80/20 in equities are worried about a possible downturn in stocks.
So, you should be too.
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Re: Fed pumping and safety net

Postby kenyan » Fri Apr 05, 2013 3:52 pm

Bob Adams wrote: bonds will get slaughtered.


I think you need to examine whether or not this statement is actually true. There are a lot of headlines and black swan scenarios that might try to convince you it's true, but in general, it's quite hyperbolic.

If your bonds have a duration of 5 years, and rates rise from a yield of ~1.5% on these instruments to 5% over the course of a couple of years, you're already made whole just a few years down the road, and probably much happier with your new yield.

If you really think that bonds are that risky, perhaps you should just buy some shorter-term bonds. 20% is not enough for an investor who cannot afford to lose much principal.
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Re: Fed pumping and safety net

Postby Leesbro63 » Fri Apr 05, 2013 6:07 pm

Better put, the bonds currently carry big downside risk, with the only chance of rewarding benefits being if we stay in an ultralow rate environment for a long time. I am in the Bernstein camp and have shortened duration. But I admit it's timing and is at least a Boglehead misdemeanor.
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Re: Fed pumping and safety net

Postby Dale_G » Fri Apr 05, 2013 6:43 pm

kenyan wrote:If your bonds have a duration of 5 years, and rates rise from a yield of ~1.5% on these instruments to 5% over the course of a couple of years, you're already made whole just a few years down the road, and probably much happier with your new yield.


The real rate on intermediate bonds is negative today. Borrowers are the only ones who will be happy down the line if nominal rates rise to 5%, 10% or higher if the real rate remains negative.

It is buying power that counts - and higher nominal rates don't imply higher buying power.

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Re: Fed pumping and safety net

Postby BigFoot48 » Fri Apr 05, 2013 7:35 pm

Bob Adams wrote:BTW I am 64 and don't want to go through another 2008 without insurance. That's my take but I've only lately gotten interested in investing. Am I on the right track? Other ideas?

I'm 64 too and think you are absolutely on the wrong track. I suggest you direct your new found interest in investing to the wealth of information available in this forum's Wiki, starting here: Bogleheads® investment philosophy

Good luck! BTW, I'm at 45% stock funds, 55% bond funds, and I'm really not concerned about what might happen in the markets if 2008 happens again (which it will) because my stock allocation is appropriate for my age and risk tolerance.
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Re: Fed pumping and safety net

Postby Leesbro63 » Fri Apr 05, 2013 8:44 pm

BigFoot48 wrote:
Bob Adams wrote:BTW I am 64 and don't want to go through another 2008 without insurance. That's my take but I've only lately gotten interested in investing. Am I on the right track? Other ideas?

I'm 64 too and think you are absolutely on the wrong track. I suggest you direct your new found interest in investing to the wealth of information available in this forum's Wiki, starting here: Bogleheads® investment philosophy

Good luck! BTW, I'm at 45% stock funds, 55% bond funds, and I'm really not concerned about what might happen in the markets if 2008 happens again (which it will) because my stock allocation is appropriate for my age and risk tolerance.


Just curious, if the market crashes (more than a 50% drop) like 2008, will you rebalance to 45% equity? Taking the "Pascal's Wager" that you could be flushing good money into bad, with the potential consequence of permanent hell (such as going for the next 20-30 years, your likely lifespan, with rebalancing shrinking your portfolio)
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Re: Fed pumping and safety net

Postby BigFoot48 » Fri Apr 05, 2013 9:17 pm

Leesbro63 wrote:Just curious, if the market crashes (more than a 50% drop) like 2008, will you rebalance to 45% equity? Taking the "Pascal's Wager" that you could be flushing good money into bad, with the potential consequence of permanent hell (such as going for the next 20-30 years, your likely lifespan, with rebalancing shrinking your portfolio)

I would not, as I consider a crash to be the market doing my rebalancing for me. I also have been fortunate to have most years of my retirement funded by dividends, cap gains, and interest (RIP) so I rarely have a need to sell stocks or bond funds, so the current NAV is not of particular concern to me, and I, or my estate, can await the inevitable market return.
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Re: Fed pumping and safety net

Postby Leesbro63 » Fri Apr 05, 2013 9:23 pm

I get the cashflow part of your comment. But if you are 45% equity and the market crashes in half (or worse), you'd then be merely 29% equity (or less). How is that being rebalanced by the market?
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Re: Fed pumping and safety net

Postby Leesbro63 » Fri Apr 05, 2013 9:29 pm

By the way, BIGFOOT48, I agree with your overall strategy. You're probably at about a 3% SWR would be my guess...that can be funded from the cashflow without having to sell. But the concern is if the market crashes, your equity allocation might fall below the amount needed to horsepower future inflation,etc. But if you rebalance to correct that, you risk possible investment hell for the rest of your life.

I found myself in a similar situation in 2008, although I was only age 48 and not yet living off my portfolio. But I realized then that if I did the planned rebal, I was risking rebalancing into poverty. So I did not rebalance. I did, however, resist the urge to sell stocks and things have come back nicely. I did my first major rebalance since before the crash last week. Am paying a big cap gains tax penalty to do so, but decided that my need and willingness to take risk dictated that I finally rebalance (from 57% equity to 52%). But had I rebalanced at DOW 6666 and it went to 3333, I would have not been able to live with those consequences. The whole exercise made me realize that "buy, hold and rebalance" isn't quite that simple.
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Re: Fed pumping and safety net

Postby BigFoot48 » Fri Apr 05, 2013 9:37 pm

Leesbro63 wrote:I get the cashflow part of your comment. But if you are 45% equity and the market crashes in half (or worse), you'd then be merely 29% equity (or less). How is that being rebalanced by the market?

It's the market telling me I should be at 29%/71% and who am I to argue with it? I was at 60% stock in October 2007 and 42% in February 2009. So I accept that, rounded up a bit, and have been at 45% ever since.

Some joking aside, I do, about annually, rebalance but in a stock market drop I would wait for the recovery before ever considering rebalancing to my risk level. So if the market dropped me to 30%, I would wait it out and hope it rises back up to 40% or so, and if 45% was still my target would indeed rebalance to there. That said, 40% would be close enough to 45% as I don't think there's any one decimal point accuracy required in hitting one's targets.

I also like the idea of only losing 22.5% of my funds in a 50% crash - I can live with that!

My withdrawal rate has been about 1.5% since starting SS benefits, although I'm bumping it up this year to take advantage of a hybrid car tax credit. Thank you future taxpayers!
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Re: Fed pumping and safety net

Postby yukon50 » Sat Apr 06, 2013 2:09 am

Leesbro63 wrote:I get the cashflow part of your comment. But if you are 45% equity and the market crashes in half (or worse), you'd then be merely 29% equity (or less). How is that being rebalanced by the market?


Yes. Why be 45% in equity at Dow 14,000 but only 29% in equity at Dow 7,000?
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Re: Fed pumping and safety net

Postby yukon50 » Sat Apr 06, 2013 2:11 am

Leesbro63 wrote:Better put, the bonds currently carry big downside risk, with the only chance of rewarding benefits being if we stay in an ultralow rate environment for a long time. I am in the Bernstein camp and have shortened duration. But I admit it's timing and is at least a Boglehead misdemeanor.


-1% to -1.5% real yields for 10-20 years would be a bad cumulative real return! I wouldn't call that rewarding.
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Re: Fed pumping and safety net

Postby kenyan » Sat Apr 06, 2013 2:40 am

Dale_G wrote:
kenyan wrote:If your bonds have a duration of 5 years, and rates rise from a yield of ~1.5% on these instruments to 5% over the course of a couple of years, you're already made whole just a few years down the road, and probably much happier with your new yield.


The real rate on intermediate bonds is negative today. Borrowers are the only ones who will be happy down the line if nominal rates rise to 5%, 10% or higher if the real rate remains negative.

It is buying power that counts - and higher nominal rates don't imply higher buying power.

Dale


Interest rates and the inflation rate are not the same thing. You're assuming that inflation rises in tandem with interest rates. Could happen, but not necessarily.
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Re: Fed pumping and safety net

Postby Bob Adams » Sat Apr 06, 2013 10:53 am

I didn't do a very good job with my original post, I'm afraid. I don't see how bonds can move opposite of equities this time when the Fed music stops. What else, besides bonds, would not be correlated to equities in the current environment? My thoughts of using Puts was to be able to maintain my 80/20 and lay off some of the risk. I could drop to a 60/40 but isn't that throwing more money at bonds? What's my best tool in this environment, insurance, bonds, or something else? I already have REIT's and international covered BTW. Thanks!
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Re: Fed pumping and safety net

Postby Call_Me_Op » Sat Apr 06, 2013 11:01 am

Bob Adams wrote:I'm heavy in equities 80/20 and would like some insurance that bonds won't be able to offer.


My insurance is that I am not (too) heavy in equities.
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Re: Fed pumping and safety net

Postby rustymutt » Sat Apr 06, 2013 11:23 am

Leesbro63 wrote:Better put, the bonds currently carry big downside risk, with the only chance of rewarding benefits being if we stay in an ultralow rate environment for a long time. I am in the Bernstein camp and have shortened duration. But I admit it's timing and is at least a Boglehead misdemeanor.



You simply can't place all bonds in a one category. As it's been stated already, duration makes a big difference in bonds with interest rates spiking. Short term bonds will recover quickly in a rising interest rate environment. A 64 year old investor should have already noted the duration of his/her bonds, and corrected any duration issues. AA and types of investments is critical inside a retirees portfolio. Chasing yield will hurt.
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Re: Fed pumping and safety net

Postby LadyGeek » Sat Apr 06, 2013 11:32 am

Welcome! No one can predict the future. If you adjust your investments for the current economic environment (or what you think it will do), wait a few months and you'll be asking the same question again. That's known as "timing the market" - you'll be worse off than if you had just ignored whatever the market is doing now and stuck with your original investment plan.

"The market can remain irrational longer than you can remain solvent." --attributed to A. Gary Shilling, Forbes Magazine, 1993.

"Stay the course" is one of the tenets of the Bogleheads® investment philosophy, which aligns to the advice given in this thread.

You should pay attention to a much larger concern - your 80/20 allocation. If you are near retirement age, as NateH and others suggest, your entire portfolio is w-a-y too risky. Why don't you start a thread in the Investing - Help with Personal Investments forum using the Asking Portfolio Questions format? We'll be able to help you better.

Which leads to the post below...
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Re: Fed pumping and safety net

Postby LadyGeek » Sat Apr 06, 2013 11:33 am

Economic policy discussions ("pumping the fed") are off-topic for this forum. There is nothing actionable here (no definitive conclusions can be drawn). This thread has run its course (advice given to the OP) and this topic is locked. See: Forum Policy

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