When does a stock become a bond before moving back to a stock again

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Sailorgirl
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When does a stock become a bond before moving back to a stock again

Post by Sailorgirl » Thu Oct 04, 2018 1:57 pm

Trying to set up a large portfolio with many different pots for retirement in 10 months is daunting. Company stock is about 28 percent of our portfolio and a cash basis pension is another 20%. . It is a Fortune 200 stock that is the leader in it’s sector with a beta of 0.00. We have been treating it as a bond with good upside growth until it dosent. Trying to rebalance towards 30/70 with an upward glide path. We are somewhat stymied in our rebalancing efforts to protect against sequence risk and now inflation risk. Because of portfolio choice linitations. Trying not to time or panic. 70 is three years from retirement. Thoughts would help. Please keep your explanations simple I am new at this.

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Re: When does a stock become a bond before moving back to a stock again

Post by Nate79 » Thu Oct 04, 2018 2:01 pm

Stock is not bonds. These are very basic ownership differences and they should not be confused between the two in ANY circumstances. Having >10% or so in a single company is VERY high risk.

rkhusky
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Re: When does a stock become a bond before moving back to a stock again

Post by rkhusky » Thu Oct 04, 2018 2:05 pm

Might want to start here: https://www.bogleheads.org/wiki/Getting_started

To provide meaningful answers, much of the information listed in this post is necessary: viewtopic.php?f=1&t=6212

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Re: When does a stock become a bond before moving back to a stock again

Post by vineviz » Thu Oct 04, 2018 2:20 pm

Sailorgirl wrote:
Thu Oct 04, 2018 1:57 pm
Company stock is about 28 percent of our portfolio and a cash basis pension is another 20%.

Let me start by saying that a pension is NOT part of your portfolio. It is an income stream (you hope), but it isn't an asset.

Also, THIS IS INCREDIBLY DANGEROUS!

35% of your portfolio is in a single stock, and its the same company that owes you a pension. You need to start selling now, as much as you can without paying a stupid amount of taxes. Your goal needs to be that you sell 2/3 of that stock in the next 3 years, no matter what.
Sailorgirl wrote:
Thu Oct 04, 2018 1:57 pm
We have been treating it as a bond with good upside growth until it dosent.


Yeah, don't do that. If it is a stock, treat it as a stock with all the risk that goes along with it.

Your goal should be to work your way toward something like the following (remember, don't count your pension or social security at all as part of your portfolio).

10% company stock
20% total US stock index
10% total international stock index
30% total bond market index
30% TIPS (short and/or intermediate-term inflation-protected securities)
Last edited by vineviz on Thu Oct 04, 2018 2:35 pm, edited 1 time in total.
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Re: When does a stock become a bond before moving back to a stock again

Post by nisiprius » Thu Oct 04, 2018 2:29 pm

Sailorgirl wrote:
Thu Oct 04, 2018 1:57 pm
...It is a Fortune 200 stock that is the leader in it’s sector with a beta of 0.00...
Where are you seeing a beta of 0.00? That sounds wrong.
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Re: When does a stock become a bond before moving back to a stock again

Post by JoMoney » Thu Oct 04, 2018 2:30 pm

vineviz wrote:
Thu Oct 04, 2018 2:20 pm
Sailorgirl wrote:
Thu Oct 04, 2018 1:57 pm
Company stock is about 28 percent of our portfolio and a cash basis pension is another 20%.

Let me start by saying that a pennons is NOT part of your portfolio. It is an income stream (you hope), but it isn't an asset.
...
:shock: :shock: :shock: How is it not an asset? It's something they expect will bring future economic benefits. It certainly isn't a liability. It may be difficult to "rebalance" it in some sort of portfolio context, but it is an asset.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: When does a stock become a bond before moving back to a stock again

Post by HEDGEFUNDIE » Thu Oct 04, 2018 2:32 pm

A stock with a [long run] beta of zero means it literally does not move [in the long run].

Why would this be a good investment?

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vineviz
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Re: When does a stock become a bond before moving back to a stock again

Post by vineviz » Thu Oct 04, 2018 2:36 pm

JoMoney wrote:
Thu Oct 04, 2018 2:30 pm
vineviz wrote:
Thu Oct 04, 2018 2:20 pm
Sailorgirl wrote:
Thu Oct 04, 2018 1:57 pm
Company stock is about 28 percent of our portfolio and a cash basis pension is another 20%.

Let me start by saying that a pennons is NOT part of your portfolio. It is an income stream (you hope), but it isn't an asset.
...
:shock: :shock: :shock: How is it not an asset? It's something they expect will bring future economic benefits. It certainly isn't a liability. It may be difficult to "rebalance" it in some sort of portfolio context, but it is an asset.
If you can't sell it and you can't buy it then it's not an asset.
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Re: When does a stock become a bond before moving back to a stock again

Post by alex_686 » Thu Oct 04, 2018 2:39 pm

vineviz wrote:
Thu Oct 04, 2018 2:20 pm
Let me start by saying that a pennons is NOT part of your portfolio. It is an income stream (you hope), but it isn't an asset.

Also, THIS IS INCREDIBLY DANGEROUS!
On the other hand, it is even more dangerous not to included it. The rational thing to do is to included both the stock and the pension as part of your asset allocation, but treat them both skeptically. FYI, there is a fair amount of debate on Bogleheads on this point, with strong views on both sides.

While it may be a leader in its sector, both Enron and GM were leading companies until they were not.

On the pension, how well is the plan funded? They need to disclose this to you. It should be more than 80%. You can treat this as a bond like asset.

I am not even sure where to begin with the equity side. Having a Beta of 0.0 would be really weird. I am not even sure what that means. You might have meant that it has a Beta of 1.0, which means it has the same risk and return profile as the overall market. Which means there is a fair amount of risk involved.

The default position on Bogleheads is that one should hold a market neutral position - i.e. the market basket, the index, etc. This should be the most efficient portfolio out there - maximum return for a given risk. The exception is if one has a strong belief in a particular position. How confident that this company will outperform the general market?

While you mull this consider these 2 points. First, most people have a irrational positive outlook on their own firm. Second, the older you get the less risk you can take. Specifically, concentrating your risk in both the equities and pension of a single firm.

I think the general advice would be to unload your stock and invest in the index. That would be my initial reaction.

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Re: When does a stock become a bond before moving back to a stock again

Post by CaliJim » Thu Oct 04, 2018 2:39 pm

JoMoney wrote:
Thu Oct 04, 2018 2:30 pm
vineviz wrote:
Thu Oct 04, 2018 2:20 pm
Sailorgirl wrote:
Thu Oct 04, 2018 1:57 pm
Company stock is about 28 percent of our portfolio and a cash basis pension is another 20%.

Let me start by saying that a pennons is NOT part of your portfolio. It is an income stream (you hope), but it isn't an asset.
...
:shock: :shock: :shock: How is it not an asset? It's something they expect will bring future economic benefits. It certainly isn't a liability. It may be difficult to "rebalance" it in some sort of portfolio context, but it is an asset.
The BH approach to pensions is to see pensions as an offset to your future expenses.... in that it decreases your planned withdrawal rate... hence reducing your FI number.
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lukestuckenhymer
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Re: When does a stock become a bond before moving back to a stock again

Post by lukestuckenhymer » Thu Oct 04, 2018 2:41 pm

vineviz wrote:
Thu Oct 04, 2018 2:36 pm
JoMoney wrote:
Thu Oct 04, 2018 2:30 pm
vineviz wrote:
Thu Oct 04, 2018 2:20 pm
Sailorgirl wrote:
Thu Oct 04, 2018 1:57 pm
Company stock is about 28 percent of our portfolio and a cash basis pension is another 20%.

Let me start by saying that a pennons is NOT part of your portfolio. It is an income stream (you hope), but it isn't an asset.
...
:shock: :shock: :shock: How is it not an asset? It's something they expect will bring future economic benefits. It certainly isn't a liability. It may be difficult to "rebalance" it in some sort of portfolio context, but it is an asset.
If you can't sell it and you can't buy it then it's not an asset.
"Accounts Receivable" is listed as an asset on a balance sheet. A (reasonably expected) future cash flow is an asset.

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Re: When does a stock become a bond before moving back to a stock again

Post by alex_686 » Thu Oct 04, 2018 2:42 pm

HEDGEFUNDIE wrote:
Thu Oct 04, 2018 2:32 pm
A stock with a [long run] beta of zero means it literally does not move [in the long run].

Why would this be a good investment?
No, it means that there is a zero correlation between the movements of the stock and its index. Which in theory could be true and which in theory both could have positive returns. However, it is darn hard to find a stock with a Beta of less than .8. 0 boggles my mind.

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Re: When does a stock become a bond before moving back to a stock again

Post by HEDGEFUNDIE » Thu Oct 04, 2018 2:42 pm

vineviz wrote:
Thu Oct 04, 2018 2:36 pm
JoMoney wrote:
Thu Oct 04, 2018 2:30 pm
vineviz wrote:
Thu Oct 04, 2018 2:20 pm
Sailorgirl wrote:
Thu Oct 04, 2018 1:57 pm
Company stock is about 28 percent of our portfolio and a cash basis pension is another 20%.

Let me start by saying that a pennons is NOT part of your portfolio. It is an income stream (you hope), but it isn't an asset.
...
:shock: :shock: :shock: How is it not an asset? It's something they expect will bring future economic benefits. It certainly isn't a liability. It may be difficult to "rebalance" it in some sort of portfolio context, but it is an asset.
If you can't sell it and you can't buy it then it's not an asset.
We’re aligned on most things vineviz, but I have to disagree with you here. What makes an assist an asset is its ability to generate economic value for its owner, not its transferability.

https://www.investopedia.com/terms/a/asset.asp

The OP could calculate the present value of the pension, applying a discount rate that reflects the riskiness of her company. This amount would then be part of her net worth.
Last edited by HEDGEFUNDIE on Thu Oct 04, 2018 2:51 pm, edited 1 time in total.

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Re: When does a stock become a bond before moving back to a stock again

Post by vineviz » Thu Oct 04, 2018 2:44 pm

lukestuckenhymer wrote:
Thu Oct 04, 2018 2:41 pm
vineviz wrote:
Thu Oct 04, 2018 2:36 pm
JoMoney wrote:
Thu Oct 04, 2018 2:30 pm
vineviz wrote:
Thu Oct 04, 2018 2:20 pm
Sailorgirl wrote:
Thu Oct 04, 2018 1:57 pm
Company stock is about 28 percent of our portfolio and a cash basis pension is another 20%.

Let me start by saying that a pennons is NOT part of your portfolio. It is an income stream (you hope), but it isn't an asset.
...
:shock: :shock: :shock: How is it not an asset? It's something they expect will bring future economic benefits. It certainly isn't a liability. It may be difficult to "rebalance" it in some sort of portfolio context, but it is an asset.
If you can't sell it and you can't buy it then it's not an asset.
"Accounts Receivable" is listed as an asset on a balance sheet. A (reasonably expected) future cash flow is an asset.
A firm can buy and sell outstanding ARs. You can't sell your own pension.
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Re: When does a stock become a bond before moving back to a stock again

Post by HEDGEFUNDIE » Thu Oct 04, 2018 2:45 pm

alex_686 wrote:
Thu Oct 04, 2018 2:42 pm
HEDGEFUNDIE wrote:
Thu Oct 04, 2018 2:32 pm
A stock with a [long run] beta of zero means it literally does not move [in the long run].

Why would this be a good investment?
No, it means that there is a zero correlation between the movements of the stock and its index. Which in theory could be true and which in theory both could have positive returns. However, it is darn hard to find a stock with a Beta of less than .8. 0 boggles my mind.
In the long run the market beta reflects a 7-10% CAGR (depending on how you define the “market”).

A stock with a long run positive return (no matter how small) would have a positive beta. A stock with a beta of zero would literally have a long run return of zero. Of course it would fluctuate up and down on a daily basis, but in the long run the return would be zero.

Again, why would the OP consider this a good investment?

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Re: When does a stock become a bond before moving back to a stock again

Post by CaliJim » Thu Oct 04, 2018 2:47 pm

Sailorgirl wrote:
Thu Oct 04, 2018 1:57 pm
Trying to set up a large portfolio with many different pots for retirement in 10 months is daunting. Company stock is about 28 percent of our portfolio and a cash basis pension is another 20%. . It is a Fortune 200 stock that is the leader in it’s sector with a beta of 0.00. We have been treating it as a bond with good upside growth until it dosent. Trying to rebalance towards 30/70 with an upward glide path. We are somewhat stymied in our rebalancing efforts to protect against sequence risk and now inflation risk. Because of portfolio choice linitations. Trying not to time or panic. 70 is three years from retirement. Thoughts would help. Please keep your explanations simple I am new at this.

POTS OF MONEY..... ugh.... maybe a liability matching portfolio would make more sense to you? (ie. tip ladder. Grok87 writes about this fairly often)

https://www.bogleheads.org/wiki/Grok%27s_tips
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Re: When does a stock become a bond before moving back to a stock again

Post by alex_686 » Thu Oct 04, 2018 2:47 pm

CaliJim wrote:
Thu Oct 04, 2018 2:39 pm
JoMoney wrote:
Thu Oct 04, 2018 2:30 pm
:shock: :shock: :shock: How is it not an asset? It's something they expect will bring future economic benefits. It certainly isn't a liability. It may be difficult to "rebalance" it in some sort of portfolio context, but it is an asset.
The BH approach to pensions is to see it as an offset to your future expenses. So it decreases your withdrawal rate, hence reducing your FI number.
Treating a pension as a offset to your future expenses is mathematically identical to treat it as a bond.

So maybe it is just semantics, expect the modeling becomes more complicated and some critical bits tend to get dropped. If you treat it like a asset you get a internally consistent model and it is easier to highly certain classes of risk.
Last edited by alex_686 on Thu Oct 04, 2018 2:49 pm, edited 1 time in total.

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Re: When does a stock become a bond before moving back to a stock again

Post by CaliJim » Thu Oct 04, 2018 2:47 pm

HEDGEFUNDIE wrote:
Thu Oct 04, 2018 2:45 pm
alex_686 wrote:
Thu Oct 04, 2018 2:42 pm
HEDGEFUNDIE wrote:
Thu Oct 04, 2018 2:32 pm
A stock with a [long run] beta of zero means it literally does not move [in the long run].

Why would this be a good investment?
No, it means that there is a zero correlation between the movements of the stock and its index. Which in theory could be true and which in theory both could have positive returns. However, it is darn hard to find a stock with a Beta of less than .8. 0 boggles my mind.
In the long run the market beta reflects a 7-10% CAGR (depending on how you define the “market”).

A stock with a long run positive return (no matter how small) would have a positive beta. A stock with a beta of zero would literally have a long run return of zero. Of course it would fluctuate up and down on a daily basis, but in the long run the return would be zero.

Again, why would the OP consider this a good investment?
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Re: When does a stock become a bond before moving back to a stock again

Post by JoMoney » Thu Oct 04, 2018 2:49 pm

vineviz wrote:
Thu Oct 04, 2018 2:44 pm
...
A firm can buy and sell outstanding ARs. You can't sell your own pension.
I don't consider that to be the defining factor, but yes.. yes, you can sell your pension. Whether or not it's wise to is a different matter.
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Re: When does a stock become a bond before moving back to a stock again

Post by CaliJim » Thu Oct 04, 2018 2:53 pm

alex_686 wrote:
Thu Oct 04, 2018 2:47 pm

Treating a pension as a offset to your future expenses is mathematically identical to treat it as a bond.

So maybe it is just semantics, expect the modeling becomes more complicated and some critical bits tend to get dropped. If you treat it like a asset you get a internally consistent model and it is easier to highly certain classes of risk.
No... I think there is more to it. I get what you are saying... but... please show me the math.

CPI and interest rates fluctuate.....

The future value of bonds fluctuate..... depending on future interest rates.

When discussing how to think about SS payments... the advice that always seemed most sensible to me was to subtract it from the expected monthly burn rate (which, I know, will fluctuate!) However.... SS will "keep up with" CPI. We don't know if Intermediate Term Bonds will.

In fact. we know, they likely wont. Bond funds are linked / driven by historic interest rates, rates when issued. Unexpected inflation or changes in interest rates can wreck havoc on bond prices.
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Re: When does a stock become a bond before moving back to a stock again

Post by alex_686 » Thu Oct 04, 2018 2:54 pm

HEDGEFUNDIE wrote:
Thu Oct 04, 2018 2:45 pm
In the long run the market beta reflects a 7-10% CAGR (depending on how you define the “market”).

A stock with a long run positive return (no matter how small) would have a positive beta. A stock with a beta of zero would literally have a long run return of zero. Of course it would fluctuate up and down on a daily basis, but in the long run the return would be zero.

Again, why would the OP consider this a good investment?
Technically, Beta is volatility of the asset in relationship to its index. Generally the S&P 500 but it depends.

I can construct the returns of a asset and a index so they both have 10% CAGR and get a Beta of zero. The easiest way of doing this would be for the asset to have a annual return of 10% and a variance in returns of 0%. This would be improbably but it would be a solution.

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Re: When does a stock become a bond before moving back to a stock again

Post by vineviz » Thu Oct 04, 2018 3:01 pm

HEDGEFUNDIE wrote:
Thu Oct 04, 2018 2:45 pm
A stock with a long run positive return (no matter how small) would have a positive beta. A stock with a beta of zero would literally have a long run return of zero. Of course it would fluctuate up and down on a daily basis, but in the long run the return would be zero.
Practically speaking, I can't imagine a stock with a beta of 0.0.

But mathematically, it is possible for an asset to have a positive long-run return AND a market beta that is zero or even negative so long as the asset's returns have no correlation with the stock benchmark in your CAPM regression.

For instance, look at the ETFs QQQ and ZROZ. Both have had positive long run returns. The former has had a beta over 1.0 while the latter has a beta approaching -1.0.

https://www.portfoliovisualizer.com/fac ... sion=false
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Re: When does a stock become a bond before moving back to a stock again

Post by JoMoney » Thu Oct 04, 2018 3:05 pm

alex_686 wrote:
Thu Oct 04, 2018 2:54 pm
...I can construct the returns of a asset and a index so they both have 10% CAGR and get a Beta of zero. The easiest way of doing this would be for the asset to have a annual return of 10% and a variance in returns of 0%. This would be improbably but it would be a solution.
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Re: When does a stock become a bond before moving back to a stock again

Post by Earl Lemongrab » Thu Oct 04, 2018 3:12 pm

A pension can be viewed as an asset, but that doesn't make it an investment. I never included my pension in my investment portfolio or its asset allocation, either before or after it was annuitized.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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Re: When does a stock become a bond before moving back to a stock again

Post by PVW » Thu Oct 04, 2018 3:20 pm

alex_686 wrote:
Thu Oct 04, 2018 2:47 pm
CaliJim wrote:
Thu Oct 04, 2018 2:39 pm
JoMoney wrote:
Thu Oct 04, 2018 2:30 pm
:shock: :shock: :shock: How is it not an asset? It's something they expect will bring future economic benefits. It certainly isn't a liability. It may be difficult to "rebalance" it in some sort of portfolio context, but it is an asset.
The BH approach to pensions is to see it as an offset to your future expenses. So it decreases your withdrawal rate, hence reducing your FI number.
Treating a pension as a offset to your future expenses is mathematically identical to treat it as a bond.

So maybe it is just semantics, expect the modeling becomes more complicated and some critical bits tend to get dropped. If you treat it like a asset you get a internally consistent model and it is easier to highly certain classes of risk.
The goal of retirement planning is to have an income stream that matches your budget. You don't need to go through the thought process of converting a known income stream into a mathematically equivalent asset only to then estimate how much income your imaginary asset can produce.

Offset your retirement budget with your pension. Adjust the risk of your invested portfolio to include the low risk of losing your pension.

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Re: When does a stock become a bond before moving back to a stock again

Post by Sailorgirl » Thu Oct 04, 2018 3:27 pm

:happy Thank you for all of your thoughtful comments. Am I allowed to name the stock in this forum? I am well aware of all of the typical investment rules but when times are tough Wall Street runs to this company. The company is almost 90 years old. It is a leader in it’s industry and we can not live without it’s product. A leading widows and orphans stock. The pension gets quarterly interest payments. We will take a lump sum distribution upon retirement and purchase treasuries. I already have a CD ladder that will carry us through the first 18 months of retirement. It’s product is not cyclical. We will not be able to build a typical bogglehead portfolio until after we retire and move our assets out of the corporate plan. The investment choices are typical of what you would see in a non Vanguard Fidelity portfolio for a company this size. I have already made a sizeable transfer to a traditional IRA. I am currently about 50/50 in my AA. There are no easy choices here. Can I name the stock?

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Re: When does a stock become a bond before moving back to a stock again

Post by Nate79 » Thu Oct 04, 2018 3:29 pm

Sailorgirl wrote:
Thu Oct 04, 2018 3:27 pm
:happy Thank you for all of your thoughtful comments. Am I allowed to name the stock in this forum? I am well aware of all of the typical investment rules but when times are tough Wall Street runs to this company. The company is almost 90 years old. It is a leader in it’s industry and we can not live without it’s product. A leading widows and orphans stock. The pension gets quarterly interest payments. We will take a lump sum distribution upon retirement and purchase treasuries. I already have a CD ladder that will carry us through the first 18 months of retirement. It’s product is not cyclical. We will not be able to build a typical bogglehead portfolio until after we retire and move our assets out of the corporate plan. The investment choices are typical of what you would see in a non Vanguard Fidelity portfolio for a company this size. I have already made a sizeable transfer to a traditional IRA. I am currently about 50/50 in my AA. There are no easy choices here. Can I name the stock?
Sure, why not name it? There is not a single stock in the US/world that would be considered part of a bond allocation.

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Re: When does a stock become a bond before moving back to a stock again

Post by CaliJim » Thu Oct 04, 2018 3:31 pm

Sailorgirl wrote:
Thu Oct 04, 2018 3:27 pm
:happy Thank you for all of your thoughtful comments. Am I allowed to name the stock in this forum? I am well aware of all of the typical investment rules but when times are tough Wall Street runs to this company. The company is almost 90 years old. It is a leader in it’s industry and we can not live without it’s product. A leading widows and orphans stock. The pension gets quarterly interest payments. We will take a lump sum distribution upon retirement and purchase treasuries. I already have a CD ladder that will carry us through the first 18 months of retirement. It’s product is not cyclical. We will not be able to build a typical bogglehead portfolio until after we retire and move our assets out of the corporate plan. The investment choices are typical of what you would see in a non Vanguard Fidelity portfolio for a company this size. I have already made a sizeable transfer to a traditional IRA. I am currently about 50/50 in my AA. There are no easy choices here. Can I name the stock?
I'm no moderator... but yes please name names

many companies have been named before, and will be named in the future I'm certain.
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Re: When does a stock become a bond before moving back to a stock again

Post by PVW » Thu Oct 04, 2018 3:34 pm

Sailorgirl wrote:
Thu Oct 04, 2018 3:27 pm
Can I name the stock?
No forum rules against it, but some people don't want to reveal too much identifying information.

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Re: When does a stock become a bond before moving back to a stock again

Post by Sailorgirl » Thu Oct 04, 2018 3:44 pm

Nextera Energy, NEE

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Re: When does a stock become a bond before moving back to a stock again

Post by dodecahedron » Thu Oct 04, 2018 3:47 pm

vineviz wrote:
Thu Oct 04, 2018 2:36 pm
If you can't sell it and you can't buy it then it's not an asset.
Economist here. The above is not correct as stated, though I see statements like this a lot on the forum. What would be correct is: ¨If you can´t sell it and you can´t buy it, then it is not a liquid asset.¨

Not all assets are liquid.

At one extreme, Treasury bills and most large company stocks are very liquid. On the other extreme, many small privately held businesses are very illiquid assets, especially to the extent the profitability of the business may depend on the continued involvement of the owner-operator. Human capital is an asset but generally a very illiquid asset. The right to receive a stream of future payments (e.g., an annuity or pension or a seller-financed mortgage) is an asset though often not a very liquid one.

Investopedia defines asset as follows:
¨Investopedia¨ wrote:
What is an 'Asset'
An asset is a resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide a future benefit. Assets are reported on a company's balance sheet and are bought or created to increase a firm's value or benefit the firm's operations. An asset can be thought of as something that, in the future, can generate cash flow, reduce expenses or improve sales, regardless of whether it's manufacturing equipment or a patent.
The right to receive a pension certainly meets this definition of an asset. (And, by the same token, the obligation to pay a pension meets the definition of a liability!) It is frequently the case that one person´s asset is someone else´s liability.

Nate79
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Re: When does a stock become a bond before moving back to a stock again

Post by Nate79 » Thu Oct 04, 2018 3:52 pm

Just because something may or may not be an asset doesn't mean it needs or should be part of your investable assets and asset allocation. I don't include my house in deciding my asset allocation and I consider a house to be very similar to a pension when thinking about providing a future income stream vs investable assets.

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Re: When does a stock become a bond before moving back to a stock again

Post by Theoretical » Thu Oct 04, 2018 3:53 pm

Would your consider posting your 401k fund options, or are these restricted stock options?

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Re: When does a stock become a bond before moving back to a stock again

Post by AlohaJoe » Thu Oct 04, 2018 4:05 pm

Sailorgirl wrote:
Thu Oct 04, 2018 3:44 pm
Nextera Energy, NEE
It has a beta of 0.27

In any case a bond is a legal contract, guaranteeing payments and you can take them to court if they miss the payment or reduce it.

No stock is like that, no matter what the beta is. That's the difference and why they are not really interchangeable.

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Re: When does a stock become a bond before moving back to a stock again

Post by HEDGEFUNDIE » Thu Oct 04, 2018 4:09 pm

vineviz wrote:
Thu Oct 04, 2018 3:01 pm
HEDGEFUNDIE wrote:
Thu Oct 04, 2018 2:45 pm
A stock with a long run positive return (no matter how small) would have a positive beta. A stock with a beta of zero would literally have a long run return of zero. Of course it would fluctuate up and down on a daily basis, but in the long run the return would be zero.
Practically speaking, I can't imagine a stock with a beta of 0.0.

But mathematically, it is possible for an asset to have a positive long-run return AND a market beta that is zero or even negative so long as the asset's returns have no correlation with the stock benchmark in your CAPM regression.

For instance, look at the ETFs QQQ and ZROZ. Both have had positive long run returns. The former has had a beta over 1.0 while the latter has a beta approaching -1.0.

https://www.portfoliovisualizer.com/fac ... sion=false
Got it. I was confusing an empirical relationship for a theoretical one. Empirically, it tends to be true that lower beta stocks deliver lower returns, and vice-versa. Lower beta -> lower volatility -> lower risk -> lower returns.

As for the OP, utilities are the classic low-beta stocks, although NEE does not appear to have a beta of zero (Capital IQ says its 5 year beta is 0.19).

More importantly though, utilities are not bulletproof. Regulatory, environmental, and legal risks are significant, and not all of it is passed down to the ratepayer. Here in California PG&E was on the hook for billions after last year's wildfires.

Theoretical
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Re: When does a stock become a bond before moving back to a stock again

Post by Theoretical » Thu Oct 04, 2018 4:22 pm

The problem with this combo of pension, stock and employment is called convergent risk, and this has tons of it.

https://m.youtube.com/watch?v=6vcxsJVBqIo

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Re: When does a stock become a bond before moving back to a stock again

Post by fsh71 » Thu Oct 04, 2018 4:23 pm

Sailorgirl wrote:
Thu Oct 04, 2018 3:44 pm
Nextera Energy, NEE
Your "bond" fell 51% in 6 months from May 2008 - Oct 2008.

jebmke
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Re: When does a stock become a bond before moving back to a stock again

Post by jebmke » Thu Oct 04, 2018 4:29 pm

HEDGEFUNDIE wrote:
Thu Oct 04, 2018 4:09 pm
More importantly though, utilities are not bulletproof. Regulatory, environmental, and legal risks are significant, and not all of it is passed down to the ratepayer. Here in California PG&E was on the hook for billions after last year's wildfires.
This highlights the difference between systematic and non-systematic risk. Diversification is the way to eliminate the latter.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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Re: When does a stock become a bond before moving back to a stock again

Post by ResearchMed » Thu Oct 04, 2018 4:30 pm

Sailorgirl wrote:
Thu Oct 04, 2018 3:44 pm
Nextera Energy, NEE
I'm not sure you have an unbiased view of this company, if you consider it to be a company that Wall Street "runs to".
It appears to be a local Florida utility.

And the fact that we cannot live without its "product" - presumably electrical power - that doesn't mean we can only get electricity from this one company.
Indeed, most of the country does not get electricity from it, unless I am misunderstanding what this company is.

I was expecting you to mention some mega-global corporation from your buildup.
But I was having trouble coming up with anything that would cause civilization to fail (we can't live without it), if it didn't produce and distribute its "product" (which would also imply almost a monopoly).

My point here is that you may be overestimating, perhaps very seriously, the safety of having such dependence upon this one company (your pension and a large part of your investments).

And HEDGEFUNDIE has also given one example of a local electrical utility that one might not want to need to depend upon for significant living expenses, in the particular case due to local disasters.
More generally, utilities are not immune to mismanagement and a variety of other problems, possibly catastrophic problems.

RM
This signature is a placebo. You are in the control group.

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Re: When does a stock become a bond before moving back to a stock again

Post by jebmke » Thu Oct 04, 2018 4:46 pm

fsh71 wrote:
Thu Oct 04, 2018 4:23 pm
Sailorgirl wrote:
Thu Oct 04, 2018 3:44 pm
Nextera Energy, NEE
Your "bond" fell 51% in 6 months from May 2008 - Oct 2008.
I guess Wall Street was running in the wrong direction.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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Re: When does a stock become a bond before moving back to a stock again

Post by vineviz » Thu Oct 04, 2018 5:06 pm

HEDGEFUNDIE wrote:
Thu Oct 04, 2018 2:42 pm

If you can't sell it and you can't buy it then it's not an asset.
We’re aligned on most things vineviz, but I have to disagree with you here. What makes an assist an asset is its ability to generate economic value for its owner, not its transferability.
[/quote]

You're probably right.

In my mind I was thinking "capital asset" but my fingers were merely typing "asset".

For the purposes of treating an investment portfolio, things like pensions and Social Security and minivans shouldn't be treated as part of the portfolio because they are not capital assets even though they are all assets.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: When does a stock become a bond before moving back to a stock again

Post by retiredjg » Thu Oct 04, 2018 5:20 pm

Sailorgirl wrote:
Thu Oct 04, 2018 1:57 pm
Trying to set up a large portfolio with many different pots for retirement in 10 months is daunting. Company stock is about 28 percent of our portfolio and a cash basis pension is another 20%. . It is a Fortune 200 stock that is the leader in it’s sector with a beta of 0.00. We have been treating it as a bond with good upside growth until it dosent. Trying to rebalance towards 30/70 with an upward glide path. We are somewhat stymied in our rebalancing efforts to protect against sequence risk and now inflation risk. Because of portfolio choice linitations. Trying not to time or panic. 70 is three years from retirement. Thoughts would help. Please keep your explanations simple I am new at this.
Your question has generated a lot of discussion that is probably not helping you at all since you asked for simple explanations. Let's see if we can get back into a discussion that benefits you.

Yes, setting up a portfolio can be daunting. :happy But it can also be very simple once you learn just a few things.

Company stock of 28% is a very high risk situation. It does not matter what the stock is or how good you or others think the stock is. This is a significant weakness in your portfolio unless you can afford to lose that 28% and still have plenty of money for retirement.

The problem is that 28% of your nest egg is tied to the same entity that will provide your pension. It is unlikely, but all of this can collapse at the same time....leaving you with a reduced pension or no pension and only 72% of your nest egg. This does not happen to a high percentage of people, but the ones who are affected can experience a complete and total catastrophe from which they never recover. People who once had bright retirement futures can actually face living in poverty. You don't want to be in that group if you can help it.

A stock is NEVER a bond. Just get that out of your mind. It may pay dividends and be bond like in that way, but it IS NOT a bond in any sense and never will be.

Stock is ownership - you own part of the company. A bond is a loan - you have loaned some of your money to whatever entity with some hope of getting the money back with some interest. But you never own the entity. Ownership and making loans are NEVER the same thing.

If you want to reallocate (not "rebalance') from what you have now to 30% stocks and 70% bonds, you have to tell us what you actually have. The best way to do this is to present your financial information in the format we use to help people with their portfolios. The closer you follow the format, the easier it is to help you. See the link at the bottom of this message for how to do that. You will learn quite a lot just by doing this exercise.

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Re: When does a stock become a bond before moving back to a stock again

Post by inbox788 » Thu Oct 04, 2018 6:58 pm

alex_686 wrote:
Thu Oct 04, 2018 2:42 pm
HEDGEFUNDIE wrote:
Thu Oct 04, 2018 2:32 pm
A stock with a [long run] beta of zero means it literally does not move [in the long run].

Why would this be a good investment?
No, it means that there is a zero correlation between the movements of the stock and its index. Which in theory could be true and which in theory both could have positive returns. However, it is darn hard to find a stock with a Beta of less than .8. 0 boggles my mind.
Try Duke Energy

https://finance.yahoo.com/quote/DUK?p=D ... in-srch-v1

FWIW, take a look at what happened to PG&E and the wildfire liabilities. If the state didn't come to the rescue, who knows where the company would wind up.
https://www.reuters.com/article/us-bank ... SKCN1LH37B

Also, compare BP to CVX after 2010 Deepwater Horizon spill. Do you want that much risk at stake concentrated on one such disaster?
https://en.wikipedia.org/wiki/Deepwater ... _oil_spill

If it's a tech company, look at NOK before and after iPhone.

OP, what's the capital gain and tax rate? Is that the issue with divesting?

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Re: When does a stock become a bond before moving back to a stock again

Post by alex_686 » Thu Oct 04, 2018 8:19 pm

CaliJim wrote:
Thu Oct 04, 2018 2:53 pm
No... I think there is more to it. I get what you are saying... but... please show me the math.

CPI and interest rates fluctuate.....

The future value of bonds fluctuate..... depending on future interest rates.

When discussing how to think about SS payments... the advice that always seemed most sensible to me was to subtract it from the expected monthly burn rate (which, I know, will fluctuate!) However.... SS will "keep up with" CPI. We don't know if Intermediate Term Bonds will.

In fact. we know, they likely wont. Bond funds are linked / driven by historic interest rates, rates when issued. Unexpected inflation or changes in interest rates can wreck havoc on bond prices.
I will point out that Mr. Bogle thinks one should treat SS as a bond like asset.

So, if you think assets such as stocks can be used to generate retirement income, then retirement income must be a asset. Whatever math you used to generate your first numbers, can be run in reserve. All you are really doing is clearly calling out 2 different income steams (pension income and required income) instead of mushing them together.

For the very simple math, when I punch the following into my calculator:
N = 15 years
I/Y = 5%
FV = 0
PMT = 1,000

I get
PV (Present Value) = $10,378 per $1,000 in pensions.

I personally would drop this into a spreadsheet to account 1. the fact that payments won't start for another 3 years and 2. expected sponsorship percentage per year. But I like complexity....

Yes, CPI and interest fluctuate, which I think is a key factor in support of treating pensions like assets. I can then ask question like what will be the impact on inflation on my portfolio - which includes stocks, bonds, pensions, house, etc. I can ask and answer these questions on a macro level. If my pension does not have a COLA, how much inflation risk am I taking on? Is it correct to hedge that inflation risk with equities? etc.

Back to the OP. Even every safe companies can blow up. I know a guy who knows a guy who was in a very similar situation as you, holding most of his portfolio at his lifetime employer, a local electric company. 1 year after he retired the company was bought out by Enron. 2 years after he retired he lost most of it.

Back to CaliJim, the neat thing about treating your pension as a asset is that you can apply a higher discount rate to account for the higher risk associated with a single point of failure.
Last edited by alex_686 on Thu Oct 04, 2018 8:41 pm, edited 1 time in total.

dash1s
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Re: When does a stock become a bond before moving back to a stock again

Post by dash1s » Thu Oct 04, 2018 9:00 pm

vineviz wrote:
Thu Oct 04, 2018 2:44 pm
lukestuckenhymer wrote:
Thu Oct 04, 2018 2:41 pm
vineviz wrote:
Thu Oct 04, 2018 2:36 pm
JoMoney wrote:
Thu Oct 04, 2018 2:30 pm
vineviz wrote:
Thu Oct 04, 2018 2:20 pm



Let me start by saying that a pennons is NOT part of your portfolio. It is an income stream (you hope), but it isn't an asset.
...
:shock: :shock: :shock: How is it not an asset? It's something they expect will bring future economic benefits. It certainly isn't a liability. It may be difficult to "rebalance" it in some sort of portfolio context, but it is an asset.
If you can't sell it and you can't buy it then it's not an asset.
"Accounts Receivable" is listed as an asset on a balance sheet. A (reasonably expected) future cash flow is an asset.
A firm can buy and sell outstanding ARs. You can't sell your own pension.
Disagree. Think firms like J G Wentworth would give a bid on pension.

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CaliJim
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Re: When does a stock become a bond before moving back to a stock again

Post by CaliJim » Fri Oct 05, 2018 12:07 am

Other posts WRT how to deal with a pension or SS in asset allocation:

viewtopic.php?t=100575
viewtopic.php?t=237007
viewtopic.php?t=134006

If you treat the NPV of a pension or SS as bond, one might be tempted to tilt more heavily towards stocks, which could potentially expose one to more risk than is necessary.

when you use it to reduce expenses, it lowers the withdrawal rate, and hence the required return and need to take risk.
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CaliJim
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Re: When does a stock become a bond before moving back to a stock again

Post by CaliJim » Mon Oct 08, 2018 11:12 pm

When does a cow become a horse? when you saddle it? and ride it?

Both are ungulates, large furry heavy mammals, eat grass, live on farms, have four legs, and hooves and don't say much.
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Re: When does a stock become a bond before moving back to a stock again

Post by g2morrow » Tue Oct 09, 2018 9:33 am

CaliJim wrote:
Fri Oct 05, 2018 12:07 am
Other posts WRT how to deal with a pension or SS in asset allocation:

viewtopic.php?t=100575
viewtopic.php?t=237007
viewtopic.php?t=134006

If you treat the NPV of a pension or SS as bond, one might be tempted to tilt more heavily towards stocks, which could potentially expose one to more risk than is necessary.

when you use it to reduce expenses, it lowers the withdrawal rate, and hence the required return and need to take risk.
+1 its the way I look at it.

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