Stock and Fixed Income Investing Decisions.
Stock and Fixed Income Investing Decisions.
What investing decisions are more difficult for you, and why? Take the poll.
Re: Stock and Fixed Income Investing Decisions.
There are so many stocks to choose from!
No excuses, no regrets.
Re: Stock and Fixed Income Investing Decisions.
All you need is TSM and TInt for stock, It's the FI that's the problem.xerty24 wrote:There are so many stocks to choose from!
All the Best, |
Joe
Re: Stock and Fixed Income Investing Decisions.
I use just one bond fund (TBM) in my 401k. It is the only one offered. Easy.
Equities are not hard, but there is more work when you start TLH. Not difficult, but does take some work.
Equities are not hard, but there is more work when you start TLH. Not difficult, but does take some work.
52% TSM, 23% TISM, 24.5% TBM, 0.5% cash
Re: Stock and Fixed Income Investing Decisions.
Well I hope to do better than just TSM/TISM, but along those lines why not just buy TBM? TSM doesn't actually have all the stocks, in the same way TBM doesn't hold all bonds, but maybe they are both "close enough" for lazy portfolios.joe8d wrote:All you need is TSM and TInt for stock, It's the FI that's the problem.xerty24 wrote:There are so many stocks to choose from!
No excuses, no regrets.
Re: Stock and Fixed Income Investing Decisions.
For me, stocks are easy. 70% TSM and 30% TISM. I have to patch it together from whatever's available in the fund lineups of various accounts. But the decision as to what stocks to invest in is very easy for me, and I barely have to think about it. (Okay I have a bit of REIT's too.)
For fixed income there are a lot of choices. Treasuries, mortgage-backeds, corporates, junk, various durations, TIPS, I-Bonds, CDs, bank accounts, foreign bank accounts with higher interest but fluctuating exchange rates, TIAA Trad (liquid or illiquid with higher interest), I even count TREA as fixed income. The decision as to what fixed income instruments to invest in is not so easy for me.
For fixed income there are a lot of choices. Treasuries, mortgage-backeds, corporates, junk, various durations, TIPS, I-Bonds, CDs, bank accounts, foreign bank accounts with higher interest but fluctuating exchange rates, TIAA Trad (liquid or illiquid with higher interest), I even count TREA as fixed income. The decision as to what fixed income instruments to invest in is not so easy for me.
Re: Stock and Fixed Income Investing Decisions.
Neither
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
Re: Stock and Fixed Income Investing Decisions.
In theory, investing in bonds should be a lot more difficult. The problem is stocks are all pretty much all the same animal, but a fixed income product is a unique contract, and a contract can contain any terms you want. Some are extremely complex. Even comparing terms on a simple bank CD can be a headache. So you can : a) Own TBM and trust Vanguard to understand what it's buying or b) Restrict the types of bonds you own to, say, Treasuries or CDs. This latter options also limits the need to diversify. As a lot of MBS owners have discovered over the past few years, complexity usually favors the seller.
Re: Stock and Fixed Income Investing Decisions.
Fixed income as there are so many differences that make such little difference.
Re: Stock and Fixed Income Investing Decisions.
Funny. I think you are onto something.dbr wrote:Fixed income as there are so many differences that make such little difference.
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Re: Stock and Fixed Income Investing Decisions.
This is a good explanation. Some types of bonds are so complex that even Vanguard can't index them.yobria wrote:"In theory, investing in bonds should be a lot more difficult. The problem is stocks are all pretty much all the same animal, but a fixed income product is a unique contract, and a contract can contain any terms you want. Some are extremely complex. Even comparing terms on a simple bank CD can be a headache. So you can : a) Own TBM and trust Vanguard to understand what it's buying or b) Restrict the types of bonds you own to, say, Treasuries or CDs. This latter options also limits the need to diversify. As a lot of MBS owners have discovered over the past few years, complexity usually favors the seller."
Re: Stock and Fixed Income Investing Decisions.
This is wrong, and the opposite way of how you should look at it. BONDS are pretty much the same (over an entire interest rate cycle). In a balanced portfolio, differences between all bonds beyond the safest 1mo bills (money market account) and the riskiest 20yr corporate bonds when we adjust for risk are almost non-existent, and are non-existent once we get out to 5yrs. Here are the 1927-2011 annualized returns for 4 portfolios of various stock (always CRSP 1-10 TSM)/bond allocations (1mo to 20yr) that all have a standard deviation of 12.3:yobria wrote:In theory, investing in bonds should be a lot more difficult. The problem is stocks are all pretty much all the same animal, but a fixed income product is a unique contract, and a contract can contain any terms you want. Some are extremely complex. Even comparing terms on a simple bank CD can be a headache. So you can : a) Own TBM and trust Vanguard to understand what it's buying or b) Restrict the types of bonds you own to, say, Treasuries or CDs. This latter options also limits the need to diversify. As a lot of MBS owners have discovered over the past few years, complexity usually favors the seller.
60 stock/40% 1mo t-bills = +7.5%
59% stock/41% 5yr t-notes = +8.3%
56% stock/44% 20yr t-bonds = +8.3%
54% stock/46% 20yr corporate bonds = +8.3%
So we see, adding higher risk bonds (longer and lower quality) to equities increases risk so that we need more bonds to reduce a balanced portfolio's overall volatility. But adjusting for risk, there is no difference. You probably want your bonds to be safer and more stable for liquidity purposes, so 5yr or less makes the most sense for the most people, but really any bond allocation (adj. for risk) will do.
Now, looking at differences in equity allocations for a 60% "stock"/40% 5YR T-note portfolio, we come to a different conclusion. Here are the 1928-2011 annualized returns for 3 portfolios of various stock (from TSM to SV)/5yr t-note allocations that all have a standard deviation of 12.4:
60% CRSP 1-10 (TSM)/40% 5YR T-Notes = +8.3%
23% TSM, 23% SV/54% 5YR T-Notes = +9.1%*
37% SV/63% 5YR T-Notes = +9.4%*
So we see, adjusting for risk, smaller and more value oriented equity allocations (for a given level of volatility) have added somewhere in the neighborhood of 1% per year higher returns. And this is on just 60% of the portfolio or less. Investors wanting higher expected returns will find even greater benefit in defining their equity mix.
This also hides the fact that the "tilted" equity allocations had less frequent declines (24% of years and -7.8% average for the TSM mix; 21% of years and -6.7% average for the TSM/SV mix; and 23% of years and -5.7% average for the SV mix) and a lower "worst annual decline" (-27% for TSM mix; -25% for TSM/SV mix; and -22% for SV mix).
Decide on your stock/bond mix, and your overall orientation between large/small and growth/value. These are the primary determinants of portfolio return. Sure, interest rate and credit enhance bond returns (and risk), but in the context of reducing equity volatility, more bond risk simply means you need more of them to do the job, less bond risk means you need less of them.
Thats why I say don't spend time worrying about bonds, it all comes out about the same. stock/size/value is where everything happens.
*Also, you see that once you have tilted moderately (in this case, a 0.4 size and 0.4 value tilt), additional small and value exposure doesn't progressively increase reward. Most will find the greatest utility in tilting modestly towards size/value, not 100% SV portfolios with even heavier fixed income allocations. You might leave a tenth of a basis point or two of return on the table (although maybe not given the extreme e(r) spread between bonds and tilted equity portfolios today), but will have less tracking error regret, greater diversification across securities, and not so much of a tax issue with extreme fixed income weightings.
Last edited by Jerry_lee on Wed Oct 17, 2012 1:35 pm, edited 1 time in total.
The most disciplined investor in the world.
Re: Stock and Fixed Income Investing Decisions.
Fixed income was the more difficult decision(s) for me. As a recent retiree I want "some" real return, do not want to reach for return, and want to sleep well at night. Of course I could simply dump all my FI assets into STT or STIG or ST Index but, and its a big but, I just do not see settling for having roughly 50% of my portfolio in a negative real return mode. Now, all comments about ST dry powder aside, dial up an M* chart and look at the volativety of GNMA and it's relative performance to ST Treasuries, STIG or the S Index. Sure, there may be lots of technical reasons to not like GNMAs but the 32 years on file of performance charting by M* do not seem to bear that out for today's or prior decades performance. .. and please, TBM holders you do own these. From there, nd I picked a like % to like debt holdings by TBM it was easier to pick what I would and would not hold.
Re: Stock and Fixed Income Investing Decisions.
What matters is total portfolio return and total amount of portfolio liquidity. Historically (see my data), differences in equities have a much larger impact on real returns than differences in bonds. An uptick in interest rates and all the benefits you assume you are getting will evaporate.midareff wrote:Fixed income was the more difficult decision(s) for me. As a recent retiree I want "some" real return, do not want to reach for return, and want to sleep well at night. Of course I could simply dump all my FI assets into STT or STIG or ST Index but, and its a big but, I just do not see settling for having roughly 50% of my portfolio in a negative real return mode. Now, all comments about ST dry powder aside, dial up an M* chart and look at the volativety of GNMA and it's relative performance to ST Treasuries, STIG or the S Index. Sure, there may be lots of technical reasons to not like GNMAs but the 32 years on file of performance charting by M* do not seem to bear that out for today's or prior decades performance. .. and please, TBM holders you do own these. From there, nd I picked a like % to like debt holdings by TBM it was easier to pick what I would and would not hold.
The most disciplined investor in the world.
Re: Stock and Fixed Income Investing Decisions.
Jerry_lee wrote:What matters is total portfolio return and total amount of portfolio liquidity. Historically (see my data), differences in equities have a much larger impact on real returns than differences in bonds. An uptick in interest rates and all the benefits you assume you are getting will evaporate.midareff wrote:Fixed income was the more difficult decision(s) for me. As a recent retiree I want "some" real return, do not want to reach for return, and want to sleep well at night. Of course I could simply dump all my FI assets into STT or STIG or ST Index but, and its a big but, I just do not see settling for having roughly 50% of my portfolio in a negative real return mode. Now, all comments about ST dry powder aside, dial up an M* chart and look at the volativety of GNMA and it's relative performance to ST Treasuries, STIG or the S Index. Sure, there may be lots of technical reasons to not like GNMAs but the 32 years on file of performance charting by M* do not seem to bear that out for today's or prior decades performance. .. and please, TBM holders you do own these. From there, nd I picked a like % to like debt holdings by TBM it was easier to pick what I would and would not hold.
Of course that is true Jerry and all of this would be much easier if we knew what the coming years would bring. It is easy to formulate portfolio allocations basd on history which may not repeat itself, and when you are not the retiree whose life style is dependant on portfolio survival in the real world. Certainly Monte and his cousins can run 127,000 simulations and provide the composite "best" chance at the resuts, just like a particular hand of cards is favored mathematically. My allocation (mostly in taxable) to equity, total market, total international, REITS, SV, SI, etc., was easy. A few years ago bonds were easy.... Intermediate Index and TIPS worked just fine. That was then, this is now. .. things changed. The world of bond investing changed and even Mr. B changed rom ST Treasuries to ST IG to get some additional basis points for his accumulation stage portfolio (as published by Mr. S.) Staying the course does not mean ride sinking ship to the bottom.
Re: Stock and Fixed Income Investing Decisions.
When we invest, we shouldn't blindly follow historical simulations or monte carlo programs. Instead, we should observe the link between risk and expected return--its probably the most important consideration in all of finance. And it exists in the stock markets and the bond markets to varying degrees. What we may or may not be going through today on a political or macroeconomic basis all boils down to risk and return. When things seem less certain (for whatever reason), markets are priced for higher returns. When things seem more certain, the opposite is true. You know better for me what is best for your situation, but you seem to imply that by (a) spending a lot of time focusing on your bond allocation, and (b) taking on additional term and credit risk in anticipation of higher returns, is going to make a huge amount of difference. It won't. Adjusted for risk, it might not make any.midareff wrote:Jerry_lee wrote:What matters is total portfolio return and total amount of portfolio liquidity. Historically (see my data), differences in equities have a much larger impact on real returns than differences in bonds. An uptick in interest rates and all the benefits you assume you are getting will evaporate.midareff wrote:Fixed income was the more difficult decision(s) for me. As a recent retiree I want "some" real return, do not want to reach for return, and want to sleep well at night. Of course I could simply dump all my FI assets into STT or STIG or ST Index but, and its a big but, I just do not see settling for having roughly 50% of my portfolio in a negative real return mode. Now, all comments about ST dry powder aside, dial up an M* chart and look at the volativety of GNMA and it's relative performance to ST Treasuries, STIG or the S Index. Sure, there may be lots of technical reasons to not like GNMAs but the 32 years on file of performance charting by M* do not seem to bear that out for today's or prior decades performance. .. and please, TBM holders you do own these. From there, nd I picked a like % to like debt holdings by TBM it was easier to pick what I would and would not hold.
Of course that is true Jerry and all of this would be much easier if we knew what the coming years would bring. It is easy to formulate portfolio allocations basd on history which may not repeat itself, and when you are not the retiree whose life style is dependant on portfolio survival in the real world. Certainly Monte and his cousins can run 127,000 simulations and provide the composite "best" chance at the resuts, just like a particular hand of cards is favored mathematically. My allocation (mostly in taxable) to equity, total market, total international, REITS, SV, SI, etc., was easy. A few years ago bonds were easy.... Intermediate Index and TIPS worked just fine. That was then, this is now. .. things changed. The world of bond investing changed and even Mr. B changed rom ST Treasuries to ST IG to get some additional basis points for his accumulation stage portfolio (as published by Mr. S.) Staying the course does not mean ride sinking ship to the bottom.
If you need higher returns, you are better off holding more equities, or tilting more to small/value, or both. Reaching for yield or taking on additional (TERM) inflation risk in an effort to boost returns is almost never a good idea for a retiree.
The most disciplined investor in the world.
Re: Stock and Fixed Income Investing Decisions.
color added to the text to simplify this ..... Jerry, thanks for the time you have spent for your comments and insight. A couple of hours reading or rereading select material periodically is NOT spending a lot of time focusing on my bond allocation. It may be in fact, considerably less time than you spend posting at this site daily. .. and I say that respectfully, as a means of comparison, not to be taken as derogitory in any way. While I don't expect it to make a huge difference, as you state, it will make a difference and I have been more than cognizant of the deleterious effects of adding term and/or risk in a "reach" for yield. Thanks for your commentary.Jerry_lee wrote:When we invest, we shouldn't blindly follow historical simulations or monte carlo programs. Instead, we should observe the link between risk and expected return--its probably the most important consideration in all of finance. And it exists in the stock markets and the bond markets to varying degrees. What we may or may not be going through today on a political or macroeconomic basis all boils down to risk and return. When things seem less certain (for whatever reason), markets are priced for higher returns. When things seem more certain, the opposite is true. You know better for me what is best for your situation, but you seem to imply that by (a) spending a lot of time focusing on your bond allocation, and (b) taking on additional term and credit risk in anticipation of higher returns, is going to make a huge amount of difference. It won't. Adjusted for risk, it might not make any.midareff wrote:Jerry_lee wrote:What matters is total portfolio return and total amount of portfolio liquidity. Historically (see my data), differences in equities have a much larger impact on real returns than differences in bonds. An uptick in interest rates and all the benefits you assume you are getting will evaporate.midareff wrote:Fixed income was the more difficult decision(s) for me. As a recent retiree I want "some" real return, do not want to reach for return, and want to sleep well at night. Of course I could simply dump all my FI assets into STT or STIG or ST Index but, and its a big but, I just do not see settling for having roughly 50% of my portfolio in a negative real return mode. Now, all comments about ST dry powder aside, dial up an M* chart and look at the volativety of GNMA and it's relative performance to ST Treasuries, STIG or the S Index. Sure, there may be lots of technical reasons to not like GNMAs but the 32 years on file of performance charting by M* do not seem to bear that out for today's or prior decades performance. .. and please, TBM holders you do own these. From there, nd I picked a like % to like debt holdings by TBM it was easier to pick what I would and would not hold.
Of course that is true Jerry and all of this would be much easier if we knew what the coming years would bring. It is easy to formulate portfolio allocations basd on history which may not repeat itself, and when you are not the retiree whose life style is dependant on portfolio survival in the real world. Certainly Monte and his cousins can run 127,000 simulations and provide the composite "best" chance at the resuts, just like a particular hand of cards is favored mathematically. My allocation (mostly in taxable) to equity, total market, total international, REITS, SV, SI, etc., was easy. A few years ago bonds were easy.... Intermediate Index and TIPS worked just fine. That was then, this is now. .. things changed. The world of bond investing changed and even Mr. B changed rom ST Treasuries to ST IG to get some additional basis points for his accumulation stage portfolio (as published by Mr. S.) Staying the course does not mean ride sinking ship to the bottom.
If you need higher returns, you are better off holding more equities, or tilting more to small/value, or both. Reaching for yield or taking on additional (TERM) inflation risk in an effort to boost returns is almost never a good idea for a retiree.
Re: Stock and Fixed Income Investing Decisions.
As a retiree whose FI is, for the most part, in a longish CD ladder, my "decisions" are akin to combat. Eleven months of sheer boredom interspersed by one month of panic. That said, while finding a spot to plop each maturing CD entails effort, as my wife keeps noting: "after all, you ARE retired."
She always points that out when I should be doing something.
She always points that out when I should be doing something.