Retiree do's and don't's in a rising rate environment by Christine Benz

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Austintatious
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Retiree do's and don't's in a rising rate environment by Christine Benz

Post by Austintatious » Fri Jun 22, 2018 10:18 am

There's been much discussion on the forum of late about rising interest rates, what it means for us and how we might respond. What does it mean for bonds? Is it time to move more into CD's, high yield savings accounts, money market funds? Ought we focus even more on retiring debt?

I just came across this article by Christine Benz, whose opinions and advice I believe are always worthy of consideration. It discusses some of these issues and offers meat-and-potato advice for us retirees and others to ponder.

https://www.morningstar.com/articles/86 ... nment.html

A portion of the text:
That said, many market participants, especially retirees with fixed-income-heavy investment mixes, are reasonably concerned about what a period of rising interest rates could mean for their portfolios and for the rest of their financial lives. Will the bond market, which has experienced declining yields but enormous price appreciation over the past three decades, reverse course? Will the losses that bond investors have experienced over the past year persist, making bonds a lost cause (or worse) in the decade(s) ahead?

I think a more nuanced take is in order. Yes, higher yields have the potential to depress bond prices in the near term. Over time, however, they're apt to have a benefit for retirees, because income contributes the largest share of the return that bond investors earn. We've already started to higher yields accruing to investors in search of income: Even as many bond-fund types have experienced losses so far in 2018, the yield on the Barclays Aggregate is now above 3%, and cash yields have also been climbing steadily.

In addition, I think it's a mistake to assume that interest rates will run inexorably upward, much as they did in the 1970s amid runaway inflation. While the economy appears to be on solid footing and inflation is trending higher, inflation is nowhere near levels that could be described as "runaway." Moreover, the current economic expansion is now nine years old, one of the longest in U.S. history. Even as higher rates are a worry, it's also possible that economic growth could begin to wane. Such a scenario would tend to weigh on stocks, while rate-sensitive bonds could prosper.

As you consider your financial and portfolio strategies amid expected future interest-rate hikes, here are some dos and don'ts to help your portfolio and the rest of your finances, weather the storms.

dbr
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Re: Retiree do's and don't's in a rising rate environment by Christine Benz

Post by dbr » Fri Jun 22, 2018 10:25 am

That is a really good article. Maybe a blitz of references to it everytime someone posts in alarm about "rising interest rate environment" would be a good thing. I especially like the reference to a "more nuanced approach."

The one thing I wish she had added was to point out that it is a person's whole portfolio that counts, not the pieces, and what the reasons are that people hold fixed income in the first place.

SimplicityNow
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Re: Retiree do's and don't's in a rising rate environment by Christine Benz

Post by SimplicityNow » Fri Jun 22, 2018 11:49 am

Thanks for the link. I agree this is a good article to read for those with concerns about how rising rates effect their bond funds.

Austintatious
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Re: Retiree do's and don't's in a rising rate environment by Christine Benz

Post by Austintatious » Fri Jun 22, 2018 12:14 pm

Yes, it really is a thoughtful article. For one thing, it helps us think of the ramifications of rising rates beyond just their impact on bond prices. For example, folks with variable rate debt - student loans, some mortgages - ought to be fully aware of how these increases are affecting their bottom line and decide if it's time to refinance or maybe accelerate payment on their loan.

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Re: Retiree do's and don't's in a rising rate environment by Christine Benz

Post by thx1138 » Sat Jun 23, 2018 6:11 am

dbr wrote:
Fri Jun 22, 2018 10:25 am
The one thing I wish she had added was to point out that it is a person's whole portfolio that counts, not the pieces, and what the reasons are that people hold fixed income in the first place.
I'm pretty sure she says almost exactly that right at the end of the article:
In other words, while you'd rather not have losses in the safe part of your portfolio you've earmarked for bonds, tumult in the bond market is going to be a lot less painful in absolute terms than will a sizable downturn in the equity market. Rather than getting hung up on micromanaging risks in your bond portfolio, a better use of your time is to revisit your portfolio's core asset-class exposures. If you've been hands-off with your portfolio and have let your equity exposure drift up, it's a good bet that you're courting more risk than you intended to.

averagedude
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Re: Retiree do's and don't's in a rising rate environment by Christine Benz

Post by averagedude » Sat Jun 23, 2018 8:38 am

This was an excellent article and i agree it. I believe that the party is over for getting 3% above inflation returns in the bond market. My advice for young investors with a long time horizon, should be heavily invested in equities.

dbr
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Re: Retiree do's and don't's in a rising rate environment by Christine Benz

Post by dbr » Sat Jun 23, 2018 8:47 am

thx1138 wrote:
Sat Jun 23, 2018 6:11 am
dbr wrote:
Fri Jun 22, 2018 10:25 am
The one thing I wish she had added was to point out that it is a person's whole portfolio that counts, not the pieces, and what the reasons are that people hold fixed income in the first place.
I'm pretty sure she says almost exactly that right at the end of the article:
In other words, while you'd rather not have losses in the safe part of your portfolio you've earmarked for bonds, tumult in the bond market is going to be a lot less painful in absolute terms than will a sizable downturn in the equity market. Rather than getting hung up on micromanaging risks in your bond portfolio, a better use of your time is to revisit your portfolio's core asset-class exposures. If you've been hands-off with your portfolio and have let your equity exposure drift up, it's a good bet that you're courting more risk than you intended to.
Yes, indeed that is well said.

columbia
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Re: Retiree do's and don't's in a rising rate environment by Christine Benz

Post by columbia » Sat Jun 23, 2018 9:18 am

The rate on 5 year treasuries bottomed out in 2012:
http://www.multpl.com/5-year-treasury-rate/table?f=m

Fallible
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Re: Retiree do's and don't's in a rising rate environment by Christine Benz

Post by Fallible » Sat Jun 23, 2018 11:09 am

Thanks for the article, which nicely addresses many of my concerns as a retiree. This section in particular referring to the Lee quote is excellent advice:

Don't Lose Sight of the Big Picture
Rising interest rates do have the potential to lead to bond losses in the years ahead, and it's wise to brace for that possibility. But as T. Rowe Price retirement-fund manager Wyatt Lee noted on a panel discussion at the Morningstar Investment Conference, "A bad year for bonds is the same as a bad day for stocks." In other words, while you'd rather not have losses in the safe part of your portfolio you've earmarked for bonds, tumult in the bond market is going to be a lot less painful in absolute terms than will a sizable downturn in the equity market. Rather than getting hung up on micromanaging risks in your bond portfolio, a better use of your time is to revisit your portfolio's core asset-class exposures. If you've been hands-off with your portfolio and have let your equity exposure drift up, it's a good bet that you're courting more risk than you intended to.
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2015
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Re: Retiree do's and don't's in a rising rate environment by Christine Benz

Post by 2015 » Sat Jun 23, 2018 1:13 pm

Fallible wrote:
Sat Jun 23, 2018 11:09 am
Thanks for the article, which nicely addresses many of my concerns as a retiree. This section in particular referring to the Lee quote is excellent advice:

Don't Lose Sight of the Big Picture
Rising interest rates do have the potential to lead to bond losses in the years ahead, and it's wise to brace for that possibility. But as T. Rowe Price retirement-fund manager Wyatt Lee noted on a panel discussion at the Morningstar Investment Conference, "A bad year for bonds is the same as a bad day for stocks." In other words, while you'd rather not have losses in the safe part of your portfolio you've earmarked for bonds, tumult in the bond market is going to be a lot less painful in absolute terms than will a sizable downturn in the equity market. Rather than getting hung up on micromanaging risks in your bond portfolio, a better use of your time is to revisit your portfolio's core asset-class exposures. If you've been hands-off with your portfolio and have let your equity exposure drift up, it's a good bet that you're courting more risk than you intended to.
If one has been hands-off with their PF without having first thought it through they have a lot more issues than simply having let their equity exposure drift up, IMO. Those who have engaged in second-order thinking with respect to all aspects of their PF before needing to do so will be unconcerned with short-term movements of any market.

Stay the course, but first set the course.

dbr
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Re: Retiree do's and don't's in a rising rate environment by Christine Benz

Post by dbr » Sat Jun 23, 2018 1:35 pm

2015 wrote:
Sat Jun 23, 2018 1:13 pm
Fallible wrote:
Sat Jun 23, 2018 11:09 am
Thanks for the article, which nicely addresses many of my concerns as a retiree. This section in particular referring to the Lee quote is excellent advice:

Don't Lose Sight of the Big Picture
Rising interest rates do have the potential to lead to bond losses in the years ahead, and it's wise to brace for that possibility. But as T. Rowe Price retirement-fund manager Wyatt Lee noted on a panel discussion at the Morningstar Investment Conference, "A bad year for bonds is the same as a bad day for stocks." In other words, while you'd rather not have losses in the safe part of your portfolio you've earmarked for bonds, tumult in the bond market is going to be a lot less painful in absolute terms than will a sizable downturn in the equity market. Rather than getting hung up on micromanaging risks in your bond portfolio, a better use of your time is to revisit your portfolio's core asset-class exposures. If you've been hands-off with your portfolio and have let your equity exposure drift up, it's a good bet that you're courting more risk than you intended to.
If one has been hands-off with their PF without having first thought it through they have a lot more issues than simply having let their equity exposure drift up, IMO. Those who have engaged in second-order thinking with respect to all aspects of their PF before needing to do so will be unconcerned with short-term movements of any market.

Stay the course, but first set the course.
I think the issue is that people who run around getting alarmed about bond NAV are just precisely not paying attention to their portfolio. That is why it is important for that article to be sure to remind people of that.

2015
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Re: Retiree do's and don't's in a rising rate environment by Christine Benz

Post by 2015 » Sat Jun 23, 2018 2:09 pm

dbr wrote:
Sat Jun 23, 2018 1:35 pm
2015 wrote:
Sat Jun 23, 2018 1:13 pm
Fallible wrote:
Sat Jun 23, 2018 11:09 am
Thanks for the article, which nicely addresses many of my concerns as a retiree. This section in particular referring to the Lee quote is excellent advice:

Don't Lose Sight of the Big Picture
Rising interest rates do have the potential to lead to bond losses in the years ahead, and it's wise to brace for that possibility. But as T. Rowe Price retirement-fund manager Wyatt Lee noted on a panel discussion at the Morningstar Investment Conference, "A bad year for bonds is the same as a bad day for stocks." In other words, while you'd rather not have losses in the safe part of your portfolio you've earmarked for bonds, tumult in the bond market is going to be a lot less painful in absolute terms than will a sizable downturn in the equity market. Rather than getting hung up on micromanaging risks in your bond portfolio, a better use of your time is to revisit your portfolio's core asset-class exposures. If you've been hands-off with your portfolio and have let your equity exposure drift up, it's a good bet that you're courting more risk than you intended to.
If one has been hands-off with their PF without having first thought it through they have a lot more issues than simply having let their equity exposure drift up, IMO. Those who have engaged in second-order thinking with respect to all aspects of their PF before needing to do so will be unconcerned with short-term movements of any market.

Stay the course, but first set the course.
I think the issue is that people who run around getting alarmed about bond NAV are just precisely not paying attention to their portfolio. That is why it is important for that article to be sure to remind people of that.
Thank you for so eloquently pointing that out. My point was if you're in retirement and not paying attention to your portfolio (other than by design) you have bigger behavioral issues that haven't been addressed. I agree we need to be reminded that we can be our greatest enemies when it comes to investing.

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Re: Retiree do's and don't's in a rising rate environment by Christine Benz

Post by SeeMoe » Sat Jun 23, 2018 4:59 pm

Just saw a Vanguard post suggesting the rule of 100 per age and bonds is still operational. I’m 75 and so , for safety, My folio AA should be 25/75. Instead it is about 45/55 and I include prime MM with the bonds. Everyone is different and in our case our pensions more than pay the bills for us, so we are sticking with the more risky 45/55 AA in the 500, extended market, international stock index and the wonderful Tax managed capital appreciation fund.3 tax exempt bond funds and the prime mm in the taxable folio. That’s how we see it, but would be queasy if a big , long bear comes along...?

SeeMoe.. :shock:
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Re: Retiree do's and don't's in a rising rate environment by Christine Benz

Post by Fallible » Sat Jun 23, 2018 7:09 pm

dbr wrote:
Sat Jun 23, 2018 1:35 pm
2015 wrote:
Sat Jun 23, 2018 1:13 pm
Fallible wrote:
Sat Jun 23, 2018 11:09 am
Thanks for the article, which nicely addresses many of my concerns as a retiree. This section in particular referring to the Lee quote is excellent advice:

Don't Lose Sight of the Big Picture
Rising interest rates do have the potential to lead to bond losses in the years ahead, and it's wise to brace for that possibility. But as T. Rowe Price retirement-fund manager Wyatt Lee noted on a panel discussion at the Morningstar Investment Conference, "A bad year for bonds is the same as a bad day for stocks." In other words, while you'd rather not have losses in the safe part of your portfolio you've earmarked for bonds, tumult in the bond market is going to be a lot less painful in absolute terms than will a sizable downturn in the equity market. Rather than getting hung up on micromanaging risks in your bond portfolio, a better use of your time is to revisit your portfolio's core asset-class exposures. If you've been hands-off with your portfolio and have let your equity exposure drift up, it's a good bet that you're courting more risk than you intended to.
If one has been hands-off with their PF without having first thought it through they have a lot more issues than simply having let their equity exposure drift up, IMO. Those who have engaged in second-order thinking with respect to all aspects of their PF before needing to do so will be unconcerned with short-term movements of any market.

Stay the course, but first set the course.
I think the issue is that people who run around getting alarmed about bond NAV are just precisely not paying attention to their portfolio. That is why it is important for that article to be sure to remind people of that.
Yes, and I also saw it as a perspective piece, which Lee's comment brought out further: to look at, or keep in mind, one's total portfolio and not just a part of it.
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Re: Retiree do's and don't's in a rising rate environment by Christine Benz

Post by rnitz » Sat Jun 23, 2018 8:01 pm

I think it should be noted that it's important to consider WHY interest rates rise, on bond portfolios. If it's due to real rises in the interest rate, then (nominal) bond investors will eventually be rewarded with higher returns on their bond portfolio. But if interest rates rise due to an increase in inflation then their bond losses are permanent (at least until inflation drops). Any higher bond returns are eaten up by the higher inflation and it's just a dead weight loss. TIPS of course can mitigate this somewhat.

Agree of course with those who point out the need to look at the whole portfolio.

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