Reaching for Yield: Is It Really Different This Time?

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Leesbro63
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Reaching for Yield: Is It Really Different This Time?

Post by Leesbro63 »

I keep reading these threads discussing Burton Malkiel, Jeremy Siegel and other "Boglehead approved" financial gurus who are saying to up stock allocation in response to near-zero fixed income interest rates.

Isn't this reaching for yield in (a thin) disguise? Ramping up risk? I get it that a zero interest bond will lose value even at 1 or 2 percent inflation, let alone what some are predicting. But who isn't there also a risk that stocks will lose more? What these messages seem to be saying is "it's different this time". Is it really?

If memory serves me right, Dr. Bernstein said there are times when we have to accept that BOTH stocks AND bonds will lose value in real terms. Maybe losing less...with short term fixed income that is subject to inflation but without loss of nominal value...is as good as it gets.

Is the Malkiel/Siegel advice, to ramp up equity allocation and reduce fixed income allocation, even in retirement, really good advice? Is it REALLY different his time?
tibbitts
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Re: Reaching for Yield: Is It Really Different This Time?

Post by tibbitts »

Leesbro63 wrote: Sun Jul 05, 2020 8:39 am I keep reading these threads discussing Burton Malkiel, Jeremy Siegel and other "Boglehead approved" financial gurus who are saying to up stock allocation in response to near-zero fixed income interest rates.

Isn't this reaching for yield in (a thin) disguise? Ramping up risk? I get it that a zero interest bond will lose value even at 1 or 2 percent inflation, let alone what some are predicting. But who isn't there also a risk that stocks will lose more? What these messages seem to be saying is "it's different this time". Is it really?

If memory serves me right, Dr. Bernstein said there are times when we have to accept that BOTH stocks AND bonds will lose value in real terms. Maybe losing less...with short term fixed income that is subject to inflation but without loss of nominal value...is as good as it gets.

Is the Malkiel/Siegel advice, to ramp up equity allocation and reduce fixed income allocation, even in retirement, really good advice? Is it REALLY different his time?
Well, a lot of "experts" have also been saying to increase exposure specifically to dividend-focused equities as alternatives to bonds - and owning those has been like getting kicked in the teeth for a while now. So it seems you not only have to select equities over bonds, you also have to select the "right" equities. Soon they will be out with a formula for momentum-based "quality" dividend investing or something.
Valuethinker
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Re: Reaching for Yield: Is It Really Different This Time?

Post by Valuethinker »

Leesbro63 wrote: Sun Jul 05, 2020 8:39 am I keep reading these threads discussing Burton Malkiel, Jeremy Siegel and other "Boglehead approved" financial gurus who are saying to up stock allocation in response to near-zero fixed income interest rates.

Isn't this reaching for yield in (a thin) disguise? Ramping up risk? I get it that a zero interest bond will lose value even at 1 or 2 percent inflation, let alone what some are predicting. But who isn't there also a risk that stocks will lose more? What these messages seem to be saying is "it's different this time". Is it really?

If memory serves me right, Dr. Bernstein said there are times when we have to accept that BOTH stocks AND bonds will lose value in real terms. Maybe losing less...with short term fixed income that is subject to inflation but without loss of nominal value...is as good as it gets.

Is the Malkiel/Siegel advice, to ramp up equity allocation and reduce fixed income allocation, even in retirement, really good advice? Is it REALLY different his time?
I am guessing this is a rhetorical question?

And the answer is of course not, it's a stupid (ish) idea.

These professors should know that Bernstein is right (ok, he's a medical doctor; he's not a PhD in financial economics, and that is what is relevant here*). That there have been times (the 1970s!) when both types of assets produced negative real returns.

Equity and bond markets do not exist in isolation. To make a case that somehow bonds are "overvalued" but that this has not already affected equities? There are no practical barriers, in developed markets, for the investor at the margin, the investor (Sovereign Wealth Fund, state pension fund, insurance fund, mutual fund manager, etc.) who sets the price, to switch assets from bonds to equities. Private Equity etc there are more barriers to getting money into the asset class. But plain vanilla bonds and equities?

You have to assume that money has made an enormous "mistake" and mispriced bonds relative to equities, and what's more, has done so for most of the last 10 years at least.

You can argue that Central Bank policy, specifically low interest rates + Quantitative Easing, has stimulated asset prices. That's almost certainly true, as best as we can "prove" it. Look at the yield on Italian government bonds, which act as if there is not significant political and fiscal risk around Italy (Narrator: there is). The UK govt went so far as to print money in March (legally the Bank of England cannot buy securities directly from HM Treasury, but in fact they engaged in "market stabilisation" and that included ... buying securities directly from the UK Treasury).

But if Central Banks owning say 40% of a nation's national debt lowers risk free interest rates, it's also going to lower corporate bond yields, and corporates are going to borrow more money and do share buybacks. Which they have been doing.

Low bond returns are in prospect. Nominal govt bonds are forecasting at best a 0% real return. That will be wrong if there is deflation - but what will deflation do to corporate profits? Or conversely if there is inflation, but then the PE on stocks is probably too high (it tends to fall against rising inflation).

Best guess is we have low bond returns (around 0 real) and low equity returns (perhaps around 3% real? Certainly 5% or less) - both at the low end of their long run averages.

My own thought is that political events will again overtake financial ones, as they have in some sense done since Covid-19 first broke out (a public health event turned out to have huge economic consequences). At which point the market will have a Wil-E-Coyote moment.

* as opposed to say a discussion of neurology, say, where his MD would be far more useful than all the financial economists in the world put together.
Last edited by Valuethinker on Sun Jul 05, 2020 10:28 am, edited 3 times in total.
Valuethinker
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Re: Reaching for Yield: Is It Really Different This Time?

Post by Valuethinker »

tibbitts wrote: Sun Jul 05, 2020 8:58 am
Leesbro63 wrote: Sun Jul 05, 2020 8:39 am I keep reading these threads discussing Burton Malkiel, Jeremy Siegel and other "Boglehead approved" financial gurus who are saying to up stock allocation in response to near-zero fixed income interest rates.

Isn't this reaching for yield in (a thin) disguise? Ramping up risk? I get it that a zero interest bond will lose value even at 1 or 2 percent inflation, let alone what some are predicting. But who isn't there also a risk that stocks will lose more? What these messages seem to be saying is "it's different this time". Is it really?

If memory serves me right, Dr. Bernstein said there are times when we have to accept that BOTH stocks AND bonds will lose value in real terms. Maybe losing less...with short term fixed income that is subject to inflation but without loss of nominal value...is as good as it gets.

Is the Malkiel/Siegel advice, to ramp up equity allocation and reduce fixed income allocation, even in retirement, really good advice? Is it REALLY different his time?
Well, a lot of "experts" have also been saying to increase exposure specifically to dividend-focused equities as alternatives to bonds - and owning those has been like getting kicked in the teeth for a while now. So it seems you not only have to select equities over bonds, you also have to select the "right" equities. Soon they will be out with a formula for momentum-based "quality" dividend investing or something.
Dividend tilting tends to be a form of "value" investing (and a weak one at that). You could wind up owning Microsoft and Apple but not Facebook or Google, because the latter don't pay dividends. Nor does Berkshire Hathaway.

So in essence dividend-focused equities have been a value factor play, and value as a factor has probably had its worst 10 years on record other than 1991-2000. Certainly its worst 5 years.

Turns out falling inflation and the threat of downright economic depression is not good for value stocks v growth stocks. And if you look at the financial performance of the top 5 tech stocks, it is pretty impressive - as businesses, they have done very well.
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Re: Reaching for Yield: Is It Really Different This Time?

Post by aristotelian »

It is definitely true that bond yields are lower than ever. The question is what that means. I don't see Siegel etc as "reaching for yield" so much as saying the risk adjusted expected return for stocks is more compelling when bond rates and expected return are so low. Similar to those who say you should move out of stocks when valuations are high. In effect, they are trying to time the bond market on the theory that rates can't get any lower. Usually market timing doesn't work but it is hard to deny how low current yields are. Another option would be to shorten duration until yields improve, but then you are giving up the diversification benefit of long bonds.
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Leesbro63
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Re: Reaching for Yield: Is It Really Different This Time?

Post by Leesbro63 »

aristotelian wrote: Sun Jul 05, 2020 9:20 am It is definitely true that bond yields are lower than ever. The question is what that means. I don't see Siegel etc as "reaching for yield" so much as saying the risk adjusted expected return for stocks is more compelling when bond rates and expected return are so low. Similar to those who say you should move out of stocks when valuations are high. In effect, they are trying to time the bond market on the theory that rates can't get any lower. Usually market timing doesn't work but it is hard to deny how low current yields are.
Are REAL bond yields REALLY "lower than ever"? It would seem to me that the more or less for 40 years (1940 ish - 1980 ish) real bonds yields were lower than inflation. Right now bonds are zero but inflation is pretty close to zero too.
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Re: Reaching for Yield: Is It Really Different This Time?

Post by vineviz »

Leesbro63 wrote: Sun Jul 05, 2020 8:39 am I keep reading these threads discussing Burton Malkiel, Jeremy Siegel and other "Boglehead approved" financial gurus who are saying to up stock allocation in response to near-zero fixed income interest rates.

Isn't this reaching for yield in (a thin) disguise? Ramping up risk?
I don’t see that as their motivation.

Instead, its a reaction to the fact low bond yields must equal a low expected return. These “gurus” aren’t suggesting that investors to increase equity allocations because bonds are “overvalued “. They’re warning investors that lower future bond returns might jeopardize retirement plans that were built assuming much higher (historical) returns.
"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: Reaching for Yield: Is It Really Different This Time?

Post by aristotelian »

Leesbro63 wrote: Sun Jul 05, 2020 9:24 am
aristotelian wrote: Sun Jul 05, 2020 9:20 am It is definitely true that bond yields are lower than ever. The question is what that means. I don't see Siegel etc as "reaching for yield" so much as saying the risk adjusted expected return for stocks is more compelling when bond rates and expected return are so low. Similar to those who say you should move out of stocks when valuations are high. In effect, they are trying to time the bond market on the theory that rates can't get any lower. Usually market timing doesn't work but it is hard to deny how low current yields are.
Are REAL bond yields REALLY "lower than ever"? It would seem to me that the more or less for 40 years (1940 ish - 1980 ish) real bonds yields were lower than inflation. Right now bonds are zero but inflation is pretty close to zero too.
Sure, that is why yields are what they are. The question is whether to lock in current inflation expectations for 5, 10, or 30 years.
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Re: Reaching for Yield: Is It Really Different This Time?

Post by Dottie57 »

Valuethinker wrote: Sun Jul 05, 2020 9:12 am
Leesbro63 wrote: Sun Jul 05, 2020 8:39 am I keep reading these threads discussing Burton Malkiel, Jeremy Siegel and other "Boglehead approved" financial gurus who are saying to up stock allocation in response to near-zero fixed income interest rates.

Isn't this reaching for yield in (a thin) disguise? Ramping up risk? I get it that a zero interest bond will lose value even at 1 or 2 percent inflation, let alone what some are predicting. But who isn't there also a risk that stocks will lose more? What these messages seem to be saying is "it's different this time". Is it really?

If memory serves me right, Dr. Bernstein said there are times when we have to accept that BOTH stocks AND bonds will lose value in real terms. Maybe losing less...with short term fixed income that is subject to inflation but without loss of nominal value...is as good as it gets.

Is the Malkiel/Siegel advice, to ramp up equity allocation and reduce fixed income allocation, even in retirement, really good advice? Is it REALLY different his time?
I am guessing this is a rhetorical question?

And the answer is of course not, it's a stupid (ish) idea.

These professors should know that Bernstein is right (ok, he's a medical doctor; he's not a PhD in financial economics, and that is what is relevant here*). That there have been times (the 1970s!) when both types of assets produced negative real returns.

Equity and bond markets do not exist in isolation. To make a case that somehow bonds are "overvalued" but that this has not already affected equities? There are no practical barriers, in developed markets, for the investor at the margin, the investor (Sovereign Wealth Fund, state pension fund, insurance fund, mutual fund manager, etc.) who sets the price, to switch assets from bonds to equities. Private Equity etc there are more barriers to getting money into the asset class. But plain vanilla bonds and equities?

You have to assume that money has made an enormous "mistake" and mispriced bonds relative to equities, and what's more, has done so for most of the last 10 years at least.

You can argue that Central Bank policy, specifically low interest rates + Quantitative Easing, has stimulated asset prices. That's almost certainly true, as best as we can "prove" it. Look at the yield on Italian government bonds, which act as if there is not significant political and fiscal risk around Italy (Narrator: there is). The UK govt went so far as to print money in March (legally the Bank of England cannot buy securities directly from HM Treasury, but in fact they engaged in "market stabilisation" and that included ... buying securities directly from the UK Treasury).

But if Central Banks owning say 40% of a nation's national debt lowers risk free interest rates, it's also going to lower corporate bond yields, and corporates are going to borrow more money and do share buybacks. Which they have been doing.

Low bond returns are in prospect. Nominal govt bonds are forecasting at best a 0% real return. That will be wrong if there is deflation - but what will deflation do to corporate profits? Or conversely if there is inflation, but then the PE on stocks is probably too high (it tends to fall against rising inflation).

Best guess is we have low bond returns (around 0 real) and low equity returns (perhaps around 3% real? Certainly 5% or less) - both at the low end of their long run averages.

My own thought is that political events will again overtake financial ones, as they have in some sense done since Covid-19 first broke out (a public health event turned out to have huge economic consequences). At which point the market will have a Wil-E-Coyote moment.

* as opposed to say a discussion of neurology, say, where his MD would be far more useful than all the financial economists in the world put together. See some of the absolutely hilarious (quartic curve fit) models on Covid-19 produced by people with an economics background, but no background in public health or epidemiology. If you don't understand that human behaviour, which can change, drives infection rates, you don't understand anything.

https://xkcd.com/2287/
Thanks for the cartoon!
bck63
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Re: Reaching for Yield: Is It Really Different This Time?

Post by bck63 »

tibbitts wrote: Sun Jul 05, 2020 8:58 am Well, a lot of "experts" have also been saying to increase exposure specifically to dividend-focused equities as alternatives to bonds - and owning those has been like getting kicked in the teeth for a while now. So it seems you not only have to select equities over bonds, you also have to select the "right" equities. Soon they will be out with a formula for momentum-based "quality" dividend investing or something.
Malkiel suggested this as a possible response to low interest rates on the recent bogleheads podcast. I'm personally not interested. I'd rather just buy the S&P 500 at an allocation I can live with.
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Re: Reaching for Yield: Is It Really Different This Time?

Post by dkturner »

Leesbro63 wrote: Sun Jul 05, 2020 9:24 am
aristotelian wrote: Sun Jul 05, 2020 9:20 am It is definitely true that bond yields are lower than ever. The question is what that means. I don't see Siegel etc as "reaching for yield" so much as saying the risk adjusted expected return for stocks is more compelling when bond rates and expected return are so low. Similar to those who say you should move out of stocks when valuations are high. In effect, they are trying to time the bond market on the theory that rates can't get any lower. Usually market timing doesn't work but it is hard to deny how low current yields are.
Are REAL bond yields REALLY "lower than ever"? It would seem to me that the more or less for 40 years (1940 ish - 1980 ish) real bonds yields were lower than inflation. Right now bonds are zero but inflation is pretty close to zero too.
That’s a very good point to make. Very few investors know that Treasury bonds produced negative real returns for more than 40 years from 1940 until 1982, and investors continued to buy bonds. It’s probably a safe bet that today’s investors will do the same thing going forward, even if equities consistently provide positive real returns. If perchance bond
investors should wise up and demand significantly positive real bond returns the huge supply of low yielding treasury bonds will become so cheap that investors will snap them up for the huge capital gains they will produce as they reach maturity.
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Re: Reaching for Yield: Is It Really Different This Time?

Post by Valuethinker »

dkturner wrote: Sun Jul 05, 2020 10:18 am
Leesbro63 wrote: Sun Jul 05, 2020 9:24 am
aristotelian wrote: Sun Jul 05, 2020 9:20 am It is definitely true that bond yields are lower than ever. The question is what that means. I don't see Siegel etc as "reaching for yield" so much as saying the risk adjusted expected return for stocks is more compelling when bond rates and expected return are so low. Similar to those who say you should move out of stocks when valuations are high. In effect, they are trying to time the bond market on the theory that rates can't get any lower. Usually market timing doesn't work but it is hard to deny how low current yields are.
Are REAL bond yields REALLY "lower than ever"? It would seem to me that the more or less for 40 years (1940 ish - 1980 ish) real bonds yields were lower than inflation. Right now bonds are zero but inflation is pretty close to zero too.
That’s a very good point to make. Very few investors know that Treasury bonds produced negative real returns for more than 40 years from 1940 until 1982, and investors continued to buy bonds. It’s probably a safe bet that today’s investors will do the same thing going forward, even if equities consistently provide positive real returns. If perchance bond
investors should wise up and demand significantly positive real bond returns the huge supply of low yielding treasury bonds will become so cheap that investors will snap them up for the huge capital gains they will produce as they reach maturity.
This is not irrational.

If you have a definable need for cash flow at x point in the future, then the instrument which will guarantee that cash flow is the zero coupon bond of that maturity. Matching cash flows. The principle on which insurance products are constructed.

Since there is uncertainty, most investors probably work within a framework of available bonds. Accepting reinvestment risk on the coupons.

One might argue that investors are undervaluing inflation protection in these circumstances. Probably true - but the inflation-linked bond market, globally, is not huge. So we can't all hedge inflation - and the expected real return for me in GBP is c -2.5% due to very low yields - it's probable that requirements on pension funds to match real, not nominal, liabilities has driven index-linked yields down that far (UK pension funds by law are indexed up to 5% inflation).

It's probably true that QE has driven nominal government bond yields down below reasonable returns. On the other hand, inflation has tended to fall under market expectations not above. Again the market has not been unreasonable in its pricing - so far.

There's an awful lot of capital out there, and there's no where to put it.

I worry more about underpricing of risky assets than overpricing of safe govt bonds: CLOs & associated buyout loans, corporate debt, EM debt etc. We are at that point in the economic cycle where chickens tend to come home to roost on credit risk. Mercifully, bank balance sheets are far stronger than they were in, say, 2008. Conversely a lot of the risk has been offloaded to places where it is harder to see it - remembering the awful consequences for financial markets of the 1998 Russian default - the impact on Long Term Capital Management in particular.

Norinchukin. This is a name we might hear more of in the months to come. (A Japanese agricultural bank that owns 10% of all CLO tranches out there - who knew?).
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Re: Reaching for Yield: Is It Really Different This Time?

Post by wootwoot »

Stick to your allocation and stop listening to "experts". Stay the course.
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Re: Reaching for Yield: Is It Really Different This Time?

Post by dkturner »

wootwoot wrote: Sun Jul 05, 2020 10:40 am Stick to your allocation and stop listening to "experts". Stay the course.
Right!

Hold onto your J.C. Penny and Sears Holdings stocks. That newfangled Amazon.com stuff is just a flash in the pan. :oops:
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Re: Reaching for Yield: Is It Really Different This Time?

Post by tibbitts »

wootwoot wrote: Sun Jul 05, 2020 10:40 am Stick to your allocation and stop listening to "experts". Stay the course.
Most people including most Bogleheads actually do stay the course. Just look at how recommendations on this forum have changed over the years. When was the last age-in-bonds post you can recall?
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Re: Reaching for Yield: Is It Really Different This Time?

Post by bck63 »

dkturner wrote: Sun Jul 05, 2020 11:27 am
wootwoot wrote: Sun Jul 05, 2020 10:40 am Stick to your allocation and stop listening to "experts". Stay the course.
Right!

Hold onto your J.C. Penny and Sears Holdings stocks. That newfangled Amazon.com stuff is just a flash in the pan. :oops:
Wondering what your returns are over, say, a 20-year period vs the S&P 500 or total market.
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Re: Reaching for Yield: Is It Really Different This Time?

Post by SB1234 »

dkturner wrote: Sun Jul 05, 2020 11:27 am
wootwoot wrote: Sun Jul 05, 2020 10:40 am Stick to your allocation and stop listening to "experts". Stay the course.
Right!

Hold onto your J.C. Penny and Sears Holdings stocks. That newfangled Amazon.com stuff is just a flash in the pan. :oops:
And your point is?
There are always experts saying something. And most times there will be different experts advocating exactly opposite positions.
anecdotes are not data
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Re: Reaching for Yield: Is It Really Different This Time?

Post by dkturner »

bck63 wrote: Sun Jul 05, 2020 12:17 pm
dkturner wrote: Sun Jul 05, 2020 11:27 am
wootwoot wrote: Sun Jul 05, 2020 10:40 am Stick to your allocation and stop listening to "experts". Stay the course.
Right!

Hold onto your J.C. Penny and Sears Holdings stocks. That newfangled Amazon.com stuff is just a flash in the pan. :oops:
Wondering what your returns are over, say, a 20-year period vs the S&P 500 or total market.
Thanks for asking. Over the last 20 years for a portfolio that has averaged about 55% equity (80% U.S. and 20% international) and 45% fixed income 6.76%, compared to 5.60% for the same mix of total stock market index, total international stock index and total bond market index.
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Re: Reaching for Yield: Is It Really Different This Time?

Post by Angst »

dkturner wrote: Sun Jul 05, 2020 10:18 am
Leesbro63 wrote: Sun Jul 05, 2020 9:24 am
aristotelian wrote: Sun Jul 05, 2020 9:20 am It is definitely true that bond yields are lower than ever. The question is what that means. I don't see Siegel etc as "reaching for yield" so much as saying the risk adjusted expected return for stocks is more compelling when bond rates and expected return are so low. Similar to those who say you should move out of stocks when valuations are high. In effect, they are trying to time the bond market on the theory that rates can't get any lower. Usually market timing doesn't work but it is hard to deny how low current yields are.
Are REAL bond yields REALLY "lower than ever"? It would seem to me that the more or less for 40 years (1940 ish - 1980 ish) real bonds yields were lower than inflation. Right now bonds are zero but inflation is pretty close to zero too.
That’s a very good point to make. Very few investors know that Treasury bonds produced negative real returns for more than 40 years from 1940 until 1982, and investors continued to buy bonds. It’s probably a safe bet that today’s investors will do the same thing going forward, even if equities consistently provide positive real returns. If perchance bond
investors should wise up and demand significantly positive real bond returns the huge supply of low yielding treasury bonds will become so cheap that investors will snap them up for the huge capital gains they will produce as they reach maturity.
Perhaps this kind of question is more easily answered in hindsight? I'm not sure what bond investors were saying about their investments back in the 1940's thru 1982, but one might state today that "Real yield bond (TIPS) yields are lower than ever", at least generally speaking across the entire spectrum of maturities. (I believe that 5-year TIPS auctioned yielding -1.311% in April 2013 might still hold the record low for now.) Positive yielding nominal bonds will always entail some risk of negative yield in the long term due to future inflation, but TIPS, even ones selling at negative yields, do not risk additional loss of yield in the future.
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldYear&year=2020
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Re: Reaching for Yield: Is It Really Different This Time?

Post by bck63 »

dkturner wrote: Sun Jul 05, 2020 3:34 pm
bck63 wrote: Sun Jul 05, 2020 12:17 pm
dkturner wrote: Sun Jul 05, 2020 11:27 am
wootwoot wrote: Sun Jul 05, 2020 10:40 am Stick to your allocation and stop listening to "experts". Stay the course.
Right!

Hold onto your J.C. Penny and Sears Holdings stocks. That newfangled Amazon.com stuff is just a flash in the pan. :oops:
Wondering what your returns are over, say, a 20-year period vs the S&P 500 or total market.
Thanks for asking. Over the last 20 years for a portfolio that has averaged about 55% equity (80% U.S. and 20% international) and 45% fixed income 6.76%, compared to 5.60% for the same mix of total stock market index, total international stock index and total bond market index.
Would you be willing to share your portfolio? Would welcome the opportunity to see it.
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Re: Reaching for Yield: Is It Really Different This Time?

Post by dkturner »

bck63 wrote: Sun Jul 05, 2020 5:16 pm
dkturner wrote: Sun Jul 05, 2020 3:34 pm
bck63 wrote: Sun Jul 05, 2020 12:17 pm
dkturner wrote: Sun Jul 05, 2020 11:27 am
wootwoot wrote: Sun Jul 05, 2020 10:40 am Stick to your allocation and stop listening to "experts". Stay the course.
Right!

Hold onto your J.C. Penny and Sears Holdings stocks. That newfangled Amazon.com stuff is just a flash in the pan. :oops:
Wondering what your returns are over, say, a 20-year period vs the S&P 500 or total market.
Thanks for asking. Over the last 20 years for a portfolio that has averaged about 55% equity (80% U.S. and 20% international) and 45% fixed income 6.76%, compared to 5.60% for the same mix of total stock market index, total international stock index and total bond market index.
Would you be willing to share your portfolio? Would welcome the opportunity to see it.
I change it around from time to time based on where I believe the best opportunities lie. Currently it’s only 30% equity (85% TSM and 15% TISM) and 70% fixed income. Since I increased my fixed income holdings from 50% to 70% in late February, 2020 won’t be a good year for me, unless there is a substantial equity correction from current levels.

Over the last 20 years the difference in my return versus the returns of the indexes is attributable to 2 changes I made over the years. (1) In late 1999 I went to a strong value weighting with my U. S. equities. from 2000 through 2008 this boosted my return by an average of 172 basis points per year for those nine years. (2) In late 2008 I switched my fixed income holdings from 75% Treasuries to 90% corporates and municipals. This boosted my returns by an average of 78 basis points per year for the last 11 years, despite the fact that I still had a value tilt to my U.S. equities (I completely removed the value tilt in February of 2020).
bck63
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Re: Reaching for Yield: Is It Really Different This Time?

Post by bck63 »

dkturner wrote: Mon Jul 06, 2020 6:13 am
bck63 wrote: Sun Jul 05, 2020 5:16 pm
dkturner wrote: Sun Jul 05, 2020 3:34 pm
bck63 wrote: Sun Jul 05, 2020 12:17 pm
dkturner wrote: Sun Jul 05, 2020 11:27 am

Right!

Hold onto your J.C. Penny and Sears Holdings stocks. That newfangled Amazon.com stuff is just a flash in the pan. :oops:
Wondering what your returns are over, say, a 20-year period vs the S&P 500 or total market.
Thanks for asking. Over the last 20 years for a portfolio that has averaged about 55% equity (80% U.S. and 20% international) and 45% fixed income 6.76%, compared to 5.60% for the same mix of total stock market index, total international stock index and total bond market index.
Would you be willing to share your portfolio? Would welcome the opportunity to see it.
I change it around from time to time based on where I believe the best opportunities lie. Currently it’s only 30% equity (85% TSM and 15% TISM) and 70% fixed income. Since I increased my fixed income holdings from 50% to 70% in late February, 2020 won’t be a good year for me, unless there is a substantial equity correction from current levels.

Over the last 20 years the difference in my return versus the returns of the indexes is attributable to 2 changes I made over the years. (1) In late 1999 I went to a strong value weighting with my U. S. equities. from 2000 through 2008 this boosted my return by an average of 172 basis points per year for those nine years. (2) In late 2008 I switched my fixed income holdings from 75% Treasuries to 90% corporates and municipals. This boosted my returns by an average of 78 basis points per year for the last 11 years, despite the fact that I still had a value tilt to my U.S. equities (I completely removed the value tilt in February of 2020).
Thanks for taking the time to share! (and I am at 30% equities as well).
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Re: Reaching for Yield: Is It Really Different This Time?

Post by CyclingDuo »

Leesbro63 wrote: Sun Jul 05, 2020 8:39 am I keep reading these threads discussing Burton Malkiel, Jeremy Siegel and other "Boglehead approved" financial gurus who are saying to up stock allocation in response to near-zero fixed income interest rates.

Isn't this reaching for yield in (a thin) disguise? Ramping up risk? I get it that a zero interest bond will lose value even at 1 or 2 percent inflation, let alone what some are predicting. But who isn't there also a risk that stocks will lose more? What these messages seem to be saying is "it's different this time". Is it really?

If memory serves me right, Dr. Bernstein said there are times when we have to accept that BOTH stocks AND bonds will lose value in real terms. Maybe losing less...with short term fixed income that is subject to inflation but without loss of nominal value...is as good as it gets.

Is the Malkiel/Siegel advice, to ramp up equity allocation and reduce fixed income allocation, even in retirement, really good advice? Is it REALLY different his time?
Add Ed Yardeni to your growing list.

https://www.cnbc.com/2020/07/06/ed-yard ... o-fed.html

https://www.youtube.com/watch?v=EDf3hyJgxxw

https://www.yardeni.com/pub/sp500corrbear.pdf
"Save like a pessimist, invest like an optimist." - Morgan Housel
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Re: Reaching for Yield: Is It Really Different This Time?

Post by Leesbro63 »

CyclingDuo wrote: Mon Jul 06, 2020 6:51 pm
Leesbro63 wrote: Sun Jul 05, 2020 8:39 am I keep reading these threads discussing Burton Malkiel, Jeremy Siegel and other "Boglehead approved" financial gurus who are saying to up stock allocation in response to near-zero fixed income interest rates.

Isn't this reaching for yield in (a thin) disguise? Ramping up risk? I get it that a zero interest bond will lose value even at 1 or 2 percent inflation, let alone what some are predicting. But who isn't there also a risk that stocks will lose more? What these messages seem to be saying is "it's different this time". Is it really?

If memory serves me right, Dr. Bernstein said there are times when we have to accept that BOTH stocks AND bonds will lose value in real terms. Maybe losing less...with short term fixed income that is subject to inflation but without loss of nominal value...is as good as it gets.

Is the Malkiel/Siegel advice, to ramp up equity allocation and reduce fixed income allocation, even in retirement, really good advice? Is it REALLY different his time?
Add Ed Yardeni to your growing list.

https://www.cnbc.com/2020/07/06/ed-yard ... o-fed.html

https://www.youtube.com/watch?v=EDf3hyJgxxw

https://www.yardeni.com/pub/sp500corrbear.pdf
I'm the original poster. Thanks for this. Another guru suggesting to ramp up risk to replace bond interest.
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Re: Reaching for Yield: Is It Really Different This Time?

Post by firebirdparts »

Leesbro63 wrote: Sun Jul 05, 2020 8:39 am Isn't this reaching for yield in (a thin) disguise?
It's important not to get lost in the platitude slinging. When people say "don't chase yield", in my opinion, that is talking about buying a financial instrument after it goes up, and you think "I want to get in on that, it goes up". So if you look at the Callan periodic table, you will readily see that you don't want last year's winner, and there's no pattern. That is what the table means and what it's used for. If you look at the SPIVA report, you'll see that mutual funds which outpace their benchmark are not terribly likely to do it every year. That is the purpose of the SPIVA report.

So yield chasing has nothing to do with somebody predicting that future bond yields will be poor. In fact, it's compatible with somebody predicting future bond yields will be poor.

So do as you wish without having to put a label on it. In my opinion, platitudes work if you stick to a narrow context, and only then.
A fool and your money are soon partners
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Re: Reaching for Yield: Is It Really Different This Time?

Post by garlandwhizzer »

I think that many experts who are suggesting increasing equity relative to the traditional 60/40 are just questioning whether 40% of an investor's portfolio should be put instruments with zero expected real return going forward. If significant real portfolio growth is necessary to reach retirement goals, 40% dead money may be too much. Even though equities are richly priced now the equity risk premium is still significantly positive, meaning that significant real gains are expected only from the equity portion of the portfolio. Life expectancy has lengthened, average length of retirement years has increased, so how are you going to be able to retire comfortably when almost half of your portfolio returns nothing real? Add to that that most expect less than historical average expected real returns from stocks. Those of us in the accumulation phase are in a tough spot these days with this double whammy. For many of us, the only way these numbers work to achieve our financial goals is to crank up equity exposure and increase risk with or without dividend tilts. It wasn't like this 30 or 40 years ago, when bonds had positive real positive yields plus principal appreciation throughout their duration from ever declining inflation and interest rates. 60/40 worked great then. Unfortunately that's not our situation now and some of us may be pushed into talking on more risk and volatility than we want.

Garland Whizzer
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Re: Reaching for Yield: Is It Really Different This Time?

Post by Schlabba »

Valuethinker wrote: Sun Jul 05, 2020 9:15 am
tibbitts wrote: Sun Jul 05, 2020 8:58 am
Leesbro63 wrote: Sun Jul 05, 2020 8:39 am I keep reading these threads discussing Burton Malkiel, Jeremy Siegel and other "Boglehead approved" financial gurus who are saying to up stock allocation in response to near-zero fixed income interest rates.

Isn't this reaching for yield in (a thin) disguise? Ramping up risk? I get it that a zero interest bond will lose value even at 1 or 2 percent inflation, let alone what some are predicting. But who isn't there also a risk that stocks will lose more? What these messages seem to be saying is "it's different this time". Is it really?

If memory serves me right, Dr. Bernstein said there are times when we have to accept that BOTH stocks AND bonds will lose value in real terms. Maybe losing less...with short term fixed income that is subject to inflation but without loss of nominal value...is as good as it gets.

Is the Malkiel/Siegel advice, to ramp up equity allocation and reduce fixed income allocation, even in retirement, really good advice? Is it REALLY different his time?
Well, a lot of "experts" have also been saying to increase exposure specifically to dividend-focused equities as alternatives to bonds - and owning those has been like getting kicked in the teeth for a while now. So it seems you not only have to select equities over bonds, you also have to select the "right" equities. Soon they will be out with a formula for momentum-based "quality" dividend investing or something.
Dividend tilting tends to be a form of "value" investing (and a weak one at that). You could wind up owning Microsoft and Apple but not Facebook or Google, because the latter don't pay dividends. Nor does Berkshire Hathaway.

So in essence dividend-focused equities have been a value factor play, and value as a factor has probably had its worst 10 years on record other than 1991-2000. Certainly its worst 5 years.

Turns out falling inflation and the threat of downright economic depression is not good for value stocks v growth stocks. And if you look at the financial performance of the top 5 tech stocks, it is pretty impressive - as businesses, they have done very well.
Didn’t Jeremy Siegel consider dividends a factor by themselves?
Secretly a dividend investor. Feel free to ask why.
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Re: Reaching for Yield: Is It Really Different This Time?

Post by Leesbro63 »

garlandwhizzer wrote: Tue Jul 07, 2020 1:55 pm I think that many experts who are suggesting increasing equity relative to the traditional 60/40 are just questioning whether 40% of an investor's portfolio should be put instruments with zero expected real return going forward. If significant real portfolio growth is necessary to reach retirement goals, 40% dead money may be too much. Even though equities are richly priced now the equity risk premium is still significantly positive, meaning that significant real gains are expected only from the equity portion of the portfolio. Life expectancy has lengthened, average length of retirement years has increased, so how are you going to be able to retire comfortably when almost half of your portfolio returns nothing real? Add to that that most expect less than historical average expected real returns from stocks. Those of us in the accumulation phase are in a tough spot these days with this double whammy. For many of us, the only way these numbers work to achieve our financial goals is to crank up equity exposure and increase risk with or without dividend tilts. It wasn't like this 30 or 40 years ago, when bonds had positive real positive yields plus principal appreciation throughout their duration from ever declining inflation and interest rates. 60/40 worked great then. Unfortunately that's not our situation now and some of us may be pushed into talking on more risk and volatility than we want.

Garland Whizzer
And yet going the other way, smart people like Rick Ferri have said if you've won the game, about 30% equity is enough.
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Re: Reaching for Yield: Is It Really Different This Time?

Post by vineviz »

Schlabba wrote: Wed Jul 08, 2020 7:56 am Didn’t Jeremy Siegel consider dividends a factor by themselves?
He might have, but after controlling for the most robust factors (value, quality, momentum, low volatility, interest rate sensitivity) dividends carry no additional explanatory power.
"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: Reaching for Yield: Is It Really Different This Time?

Post by Munir »

Is the conclusion then that there isn't an A-rated (or above) fixed income vehicle at present that will provide a return higher than inflation?
Last edited by Munir on Thu Jul 09, 2020 3:07 pm, edited 1 time in total.
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Re: Reaching for Yield: Is It Really Different This Time?

Post by Valuethinker »

Munir wrote: Wed Jul 08, 2020 9:39 am Is the conclusion then that there isn't an at least A-rated fixed income vehicle at present that will provide a return higher than inflation?
Yes.

"Expected inflation" rather than inflation

However some US TIPs bonds are paying a positive real yield (so against expected inflation). Last I checked.

That plus US ibonds provide prospective real yields which are positive.
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Re: Reaching for Yield: Is It Really Different This Time?

Post by vineviz »

Munir wrote: Wed Jul 08, 2020 9:39 am Is the conclusion then that there isn't an at least A-rated fixed income vehicle at present that will provide a return higher than inflation?
No, I don't think that's the implication. There are many A-rated or better bonds with expected real yields > 0. The fear is that many investors have not saved enough to retire on a portfolio constructed of such bonds.

In other words, investors have grown accustomed to funds like Vanguard Total Bond Market Index returning 3% or 4% above inflation and may not be prepared for a decade or more in which such a fund might just barely match inflation.
"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: Reaching for Yield: Is It Really Different This Time?

Post by MotoTrojan »

While the potential for negative real returns (or lower positive ones) on bonds is certainly a factor, equity returns (primarily in the US) also have lower expected future returns which is another factor in the recommendation to shift some assets towards equities and away from bonds.

If this makes an investor uncomfortable they do have another option, simply withdraw less (or save more).
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Re: Reaching for Yield: Is It Really Different This Time?

Post by Munir »

As an older retiree in the distribution phase and a limited time horizon, it seems to me that both equities and bonds are too risky for someone like me in this environment. It may be that the current 1% yield (interest) on a high yield savings account (or a ladder of CDs) is the best I can look forward to. I will consider inflation as an inescapable expense just like any financial emergency and just conserve my principal- which can sustain me for the rest of my life. I don't know what assets that may leave to my heirs but whatever it is will be better than losing most of my assets before I die and asking them to support me in a nursing home :happy . I'd like to hear contrarian views.
Last edited by Munir on Thu Jul 09, 2020 12:33 pm, edited 1 time in total.
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Re: Reaching for Yield: Is It Really Different This Time?

Post by Leesbro63 »

Munir wrote: Thu Jul 09, 2020 12:30 pm As an older retiree in the distribution phase and a limited time horizon, it seems to me that both equities and bonds are too risky for someone like me in this environment. It may be that the current 1% yield (interest) on a high yield savings account (or a ladder of CDs) is the best I can look forward to. I will consider inflation as unescapable expense just like any financial emergency and just conserve my principal- which can sustain me for the rest of my life. I don't know what assets that may leave to my heirs but whatever it is will be better than losing most of my assets before I die and asking them to support me in a nursing home :happy . I'd like to hear contrarian views.
This sounds similar to Dr. Bernstein's argument.
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Re: Reaching for Yield: Is It Really Different This Time?

Post by Munir »

Leesbro63 wrote: Thu Jul 09, 2020 12:32 pm
Munir wrote: Thu Jul 09, 2020 12:30 pm As an older retiree in the distribution phase and a limited time horizon, it seems to me that both equities and bonds are too risky for someone like me in this environment. It may be that the current 1% yield (interest) on a high yield savings account (or a ladder of CDs) is the best I can look forward to. I will consider inflation as inescapable expense just like any financial emergency and just conserve my principal- which can sustain me for the rest of my life. I don't know what assets that may leave to my heirs but whatever it is will be better than losing most of my assets before I die and asking them to support me in a nursing home :happy . I'd like to hear contrarian views.
This sounds similar to Dr. Bernstein's argument.
Maybe because I am also a retired physician!!
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Re: Reaching for Yield: Is It Really Different This Time?

Post by galeno »

Penny wise and dollar foolish. KISS.

A 50/50 port should generate a net REAL CAGR = 2.0%. At 4.0% AWR the retirement money should last 50 years. Firecalc.com says the 4% AWR is 95% safe for 30 years.

A 100% cash port should generate a net REAL CAGR = -2.0%. At 4.0% AWR the retirement money should last 25 years. Firecalc.com says the 4% AWR is 65% safe for 30 years.
KISS & STC.
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Re: Reaching for Yield: Is It Really Different This Time?

Post by vineviz »

galeno wrote: Thu Jul 09, 2020 12:58 pm A 50/50 port should generate a net REAL CAGR = 2.0%. At 4.0% AWR the retirement money should last 50 years. Firecalc.com says the 4% AWR is 95% safe for 30 years.
Those figures are way off. With an expected real return of 2%, a 4% withdrawal rate has less than a 60 % chance of surviving for 30 years not a 95% chance.

There's an error somewhere in your simulation.
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Re: Reaching for Yield: Is It Really Different This Time?

Post by SantaClaraSurfer »

My two cents would be that since fixed income rates declining often indicate a pending recession and decline in equity prices, it does not make sense to "reach for yield" into equities, unless a drop in equity prices has created an AA mandate for it.

ie. It's often precisely when the current scenario plays out, that you should do nothing (ie. stay the course) until something else changes.

I will happily purchase my small share of the equities folks "reaching for yield" are purchasing now in the event of a major decline in equity prices, otherwise I'm fine with being patient and investing/saving new money per our established AA.
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Re: Reaching for Yield: Is It Really Different This Time?

Post by Orbuculum Nongata »

Leesbro63 wrote: Sun Jul 05, 2020 8:39 am
Is the Malkiel/Siegel advice, to ramp up equity allocation and reduce fixed income allocation, even in retirement, really good advice? Is it REALLY different his time?
My opinion is that it seems more like an episode of “As the Pendulum Swings” than it does good advice. Past “it’s-different-this-timers” have been unable to eliminate regency bias from their calculations and I expect this to be the case today as well.

It’s different this time - ability to predict future = possible risk > stay the course
I think I can > I believe I can > I did
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Re: Reaching for Yield: Is It Really Different This Time?

Post by garlandwhizzer »

Munir wrote:

I'd like to hear contrarian views.
Munir, you asked for contrarian views so I'll add my 2 cents worth. This is only the way I see it, not a recommendation for anyone but me.

Personally, I do not have much fear of equity volatility and am not a risk averse individual. I have been investing long enough to have experienced plenty of risk and volatility and become a bit habituated to it by now. Since the crash of 2000-3 when I learned a nasty lesson I have maintained at least 30% portfolio weight in bond holdings. Prior to that during the greatest bull market in history I had been 100% invested in high beta equity since 1987, buying tech laden mutual funds every month from my income, fully riding that massive positive wave. I became a victim of euphoria until I lost millions in that 3 year span 2000-3 since I was 100% in high beta tech which totally collapsed. The good news is that I had made more millions prior to that than I lost. It did teach me a lesson I have never forgotten. Fortunately in 2003 I still had assets and learned the hard way the foolishness of no bonds and lack of equity diversification. I put 30% of assets in bonds when it recovered and salvaged some of my extreme losses with tax loss harvesting. But I stayed 70% in equity, more diversified now with low cost index funds. Since then I have never had less than 30% bonds, gradually rising now to about 40%+ now.

My point of view is to keep enough bonds to sleep at night and avoid panic selling even in a severe bear market. I do not believe that a diversified equity portfolio has any risk of going to zero value. Long term equity investing is IMO a winning game unless you make behavioral mistakes. I still find it hard to accept a zero expected real return for 60% or 70% bonds in my portfolio. I'm 73 now and have won the game. I have been living off my portfolio without other income other than SS since I retired at age 50, 23 years ago. Due to consistently large equity exposure my investment portfolio is actually larger now than it was the day I retired. I do not plan for 25 or 30 or 40 years of retirement, but instead to have sufficient equity exposure to maintain the portfolio value stable decade after decade. I believe I've been very lucky to have invested for so long and especially in such great market conditions which I do not expect to continue unabated in the future. Most of my success is merely good luck, but I believe it possible that luck may even out. Very bad and totally unexpected things can happen at any time in the future. I could get Alzheimers, stroke out, need years of outrageously expensive care, the list goes on and on. Covid-19 is reminder of the high level of uncertainty that that the future can spring on us at any time. Such bad things can happen not only to stocks but to bonds also (inflation unless you have TIPS which currently have negative real yields). As Dr. Bernstein has pointed out with his concept of deep risk Treasuries were a portfolio killer from 1940 -1980 in real terms. I therefore want to have a massive financial buffer with plenty of both risk and supposedly safe assets. If the nightmare doesn't happen, the bad news is I die rich and leave a legacy.

Incidentally, like Munir and Dr. Bernstein, I also am a retired MD. Not all doctors see it the same way, same way with other professions.

Garland Whizzer
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Re: Reaching for Yield: Is It Really Different This Time?

Post by hoops777 »

The truth is nobody really knows what to do. People of course hate the idea of investing 40,50 pct or more in something that is not making any money.
There is no GOOD answer from anyone here or the experts,because there is no good answer. Accept nothing or accept additional risk.
I have an account at a firm specializing in Bonds where we own a couple 30 year GO munis paying about 5 pct.
I asked the guy I know there yesterday what do you recommend for income. For Ca.he suggested a Pimco closed end muni fund that he has personally owned for almost 20 years,PCK,currently paying about 4.3 tax free.That was his advice to buy on my own for income through Schwab.

He said it generally stays in the 9 and 10 range except for the brief market crash we had. Am I going to buy it? Maybe a small amount. It is actually 5 stars on Morningstar for what that is worth.
Last edited by hoops777 on Thu Jul 09, 2020 4:39 pm, edited 1 time in total.
K.I.S.S........so easy to say so difficult to do.
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Re: Reaching for Yield: Is It Really Different This Time?

Post by JackoC »

Valuethinker wrote: Wed Jul 08, 2020 9:42 am
Munir wrote: Wed Jul 08, 2020 9:39 am Is the conclusion then that there isn't an at least A-rated fixed income vehicle at present that will provide a return higher than inflation?
Yes.
"Expected inflation" rather than inflation
However some US TIPs bonds are paying a positive real yield (so against expected inflation). Last I checked.
That plus US ibonds provide prospective real yields which are positive.
The 2-5+ yr part of the TIPS curve now is roughly -1%, the 10 yr ~-.8%, 30 yr -.2%, that is real yield, ie after inflation (as per CPI-U) adjustment to the principal amount. One imperfect read on 'expected inflation' is the breakeven inflation rate comparing nominal treasury and TIPS yields, which is around 1.23% now in 5 yrs, TIPS approx -0.96%, 5 yr note yield ~+0.27%. So 'woe is us, real bond yields have become zero' is now optimistic, unfortunately.

New I-bonds have a fixed rate of zero, ie zero real return, but the purchase limit makes them of limited relevance to many. Best yielding FDIC/NCUA insured CD's give significantly more than the 1.23% TIPS breakeven in 5 yr, near 2% for the handful of best bank/credit unions 5 yr CD's right now, the best dozen or so are 1.50% or more. That's where you can get more or less pure US federal risk yielding above the TIPS BE, pre tax, if the mechanics of CD's suit. Vanguard Total Bond has SEC yield 1.34% now, in the ballpark of the TIPS breakeven at the stated maturity, but it involves taking non-negligible risks you don't take with either nominal treasuries, TIPS or CD's (significant credit risk on the ~20% that's only BBB, lesser but still greater than treasury/CD risk credit risk on most of the rest, embedded interest rate options you're short when you own mortgage or corporate bonds, etc). That doesn't make TBM a bad choice necessarily, but its yield does not refute the statement that 'riskless assets' in USD now have definitively negative real expected return.

I don't think this means stocks have gotten cheaper relative to bonds. I think more likely they've both gotten about equally more expensive, it's just more directly visible with bonds. So I start with a lot of skepticism about increasing equity allocation in response. That's definitely not for me anyway.
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Re: Reaching for Yield: Is It Really Different This Time?

Post by Munir »

garlandwhizzer wrote: Thu Jul 09, 2020 2:28 pm
Munir wrote:

I'd like to hear contrarian views.
Munir, you asked for contrarian views so I'll add my 2 cents worth. This is only the way I see it, not a recommendation for anyone but me.

Personally, I do not have much fear of equity volatility and am not a risk averse individual. I have been investing long enough to have experienced plenty of risk and volatility and become a bit habituated to it by now. Since the crash of 2000-3 when I learned a nasty lesson I have maintained at least 30% portfolio weight in bond holdings. Prior to that during the greatest bull market in history I had been 100% invested in high beta equity since 1987, buying tech laden mutual funds every month from my income, fully riding that massive positive wave. I became a victim of euphoria until I lost millions in that 3 year span 2000-3 since I was 100% in high beta tech which totally collapsed. The good news is that I had made more millions prior to that than I lost. It did teach me a lesson I have never forgotten. Fortunately in 2003 I still had assets and learned the hard way the foolishness of no bonds and lack of equity diversification. I put 30% of assets in bonds when it recovered and salvaged some of my extreme losses with tax loss harvesting. But I stayed 70% in equity, more diversified now with low cost index funds. Since then I have never had less than 30% bonds, gradually rising now to about 40%+ now.

My point of view is to keep enough bonds to sleep at night and avoid panic selling even in a severe bear market. I do not believe that a diversified equity portfolio has any risk of going to zero value. Long term equity investing is IMO a winning game unless you make behavioral mistakes. I still find it hard to accept a zero expected real return for 60% or 70% bonds in my portfolio. I'm 73 now and have won the game. I have been living off my portfolio without other income other than SS since I retired at age 50, 23 years ago. Due to consistently large equity exposure my investment portfolio is actually larger now than it was the day I retired. I do not plan for 25 or 30 or 40 years of retirement, but instead to have sufficient equity exposure to maintain the portfolio value stable decade after decade. I believe I've been very lucky to have invested for so long and especially in such great market conditions which I do not expect to continue unabated in the future. Most of my success is merely good luck, but I believe it possible that luck may even out. Very bad and totally unexpected things can happen at any time in the future. I could get Alzheimers, stroke out, need years of outrageously expensive care, the list goes on and on. Covid-19 is reminder of the high level of uncertainty that that the future can spring on us at any time. Such bad things can happen not only to stocks but to bonds also (inflation unless you have TIPS which currently have negative real yields). As Dr. Bernstein has pointed out with his concept of deep risk Treasuries were a portfolio killer from 1940 -1980 in real terms. I therefore want to have a massive financial buffer with plenty of both risk and supposedly safe assets. If the nightmare doesn't happen, the bad news is I die rich and leave a legacy.

Incidentally, like Munir and Dr. Bernstein, I also am a retired MD. Not all doctors see it the same way, same way with other professions.

Garland Whizzer
Thank you, Garland, for your comments and for sharing your financial life story. A couple of comments: my remark that I also am a physician is true but tongue in cheek. Most physicians know very little about investments and rely on advisers. In contrast to you, I will be 83 next month, am a recent widower with adult independent children, and consider you at 73 as still quite young which is a fact in the retirement community I live in. At age 73 my views were the same as yours above. I wonder what you will think in 10 years from now. Maybe it's a glide path.
BTW, I am still diversified among one stock fund, a few bond funds, and some SPIAs. My equities are about 27% of the portfolio and will likely stay at that. I am still studying the views I expounded earlier.
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Re: Reaching for Yield: Is It Really Different This Time?

Post by palanzo »

galeno wrote: Thu Jul 09, 2020 12:58 pm Penny wise and dollar foolish. KISS.

A 50/50 port should generate a net REAL CAGR = 2.0%. At 4.0% AWR the retirement money should last 50 years. Firecalc.com says the 4% AWR is 95% safe for 30 years.

A 100% cash port should generate a net REAL CAGR = -2.0%. At 4.0% AWR the retirement money should last 25 years. Firecalc.com says the 4% AWR is 65% safe for 30 years.
I'm curious which funds you use for 15% TIPS + 15% Corps + 15% US Treas + 5% CASH.
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Re: Reaching for Yield: Is It Really Different This Time?

Post by AerialWombat »

Leesbro63 wrote: Sun Jul 05, 2020 8:39 am
Is the Malkiel/Siegel advice, to ramp up equity allocation and reduce fixed income allocation, even in retirement, really good advice? Is it REALLY different his time?
Just my opinion, but I think the better question is, “Does it matter to your financial situation?”

If your savings rate is high enough and you have enough years to save, your real return can be zero and you will be fine. If not, then your AA needs to be more aggressive in general anyway.
palanzo
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Re: Reaching for Yield: Is It Really Different This Time?

Post by palanzo »

JackoC wrote: Thu Jul 09, 2020 2:49 pm
Valuethinker wrote: Wed Jul 08, 2020 9:42 am
Munir wrote: Wed Jul 08, 2020 9:39 am Is the conclusion then that there isn't an at least A-rated fixed income vehicle at present that will provide a return higher than inflation?
Yes.
"Expected inflation" rather than inflation
However some US TIPs bonds are paying a positive real yield (so against expected inflation). Last I checked.
That plus US ibonds provide prospective real yields which are positive.
The 2-5+ yr part of the TIPS curve now is roughly -1%, the 10 yr ~-.8%, 30 yr -.2%, that is real yield, ie after inflation (as per CPI-U) adjustment to the principal amount. One imperfect read on 'expected inflation' is the breakeven inflation rate comparing nominal treasury and TIPS yields, which is around 1.23% now in 5 yrs, TIPS approx -0.96%, 5 yr note yield ~+0.27%. So 'woe is us, real bond yields have become zero' is now optimistic, unfortunately.

New I-bonds have a fixed rate of zero, ie zero real return, but the purchase limit makes them of limited relevance to many. Best yielding FDIC/NCUA insured CD's give significantly more than the 1.23% TIPS breakeven in 5 yr, near 2% for the handful of best bank/credit unions 5 yr CD's right now, the best dozen or so are 1.50% or more. That's where you can get more or less pure US federal risk yielding above the TIPS BE, pre tax, if the mechanics of CD's suit. Vanguard Total Bond has SEC yield 1.34% now, in the ballpark of the TIPS breakeven at the stated maturity, but it involves taking non-negligible risks you don't take with either nominal treasuries, TIPS or CD's (significant credit risk on the ~20% that's only BBB, lesser but still greater than treasury/CD risk credit risk on most of the rest, embedded interest rate options you're short when you own mortgage or corporate bonds, etc). That doesn't make TBM a bad choice necessarily, but its yield does not refute the statement that 'riskless assets' in USD now have definitively negative real expected return.

I don't think this means stocks have gotten cheaper relative to bonds. I think more likely they've both gotten about equally more expensive, it's just more directly visible with bonds. So I start with a lot of skepticism about increasing equity allocation in response. That's definitely not for me anyway.
Which CDs are yielding "near 2% for the handful of best bank/credit unions 5 yr CD's right now"?
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Leesbro63
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Re: Reaching for Yield: Is It Really Different This Time?

Post by Leesbro63 »

AerialWombat wrote: Thu Jul 09, 2020 3:38 pm
Leesbro63 wrote: Sun Jul 05, 2020 8:39 am
Is the Malkiel/Siegel advice, to ramp up equity allocation and reduce fixed income allocation, even in retirement, really good advice? Is it REALLY different his time?
Just my opinion, but I think the better question is, “Does it matter to your financial situation?”

If your savings rate is high enough and you have enough years to save, your real return can be zero and you will be fine. If not, then your AA needs to be more aggressive in general anyway.
And yet the opposite argument can be made: If your savings rate is high enough and you have enough years to save, you can afford to take on more risk. If not, then your AA risk can't afford to be more aggressive in general anyway.
hoops777
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Re: Reaching for Yield: Is It Really Different This Time?

Post by hoops777 »

I wonder if those of you who are retired and taking RMD’s even care about income producing investments.
I have been thinking income but have realized when I start taking RMD’s in a few years,they will be more income than we need with our SS.
So choosing what to sell is all that matters for anyone in that situation.
K.I.S.S........so easy to say so difficult to do.
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galeno
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Re: Reaching for Yield: Is It Really Different This Time?

Post by galeno »

TIPS = IDTP
Corps = VDCP
US Treas = VDTY
Cash USD = 20% in each MMF, 3, 6, 9, 12 mo CDs.
palanzo wrote: Thu Jul 09, 2020 3:32 pm
galeno wrote: Thu Jul 09, 2020 12:58 pm Penny wise and dollar foolish. KISS.

A 50/50 port should generate a net REAL CAGR = 2.0%. At 4.0% AWR the retirement money should last 50 years. Firecalc.com says the 4% AWR is 95% safe for 30 years.

A 100% cash port should generate a net REAL CAGR = -2.0%. At 4.0% AWR the retirement money should last 25 years. Firecalc.com says the 4% AWR is 65% safe for 30 years.
I'm curious which funds you use for 15% TIPS + 15% Corps + 15% US Treas + 5% CASH.
KISS & STC.
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