How to Compare Fixed Asset Investments

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Portfolio7
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How to Compare Fixed Asset Investments

Post by Portfolio7 »

I am returning to a prior topic after trying to incorporate the basics I learned earlier, but it requires a little background, and involves a more generic question about bond (carry) returns. I appreciate any thoughts the community might have; I struggle a bit with Bond concepts:

We are in our early 50's, and invest about 25% of our portfolio in Fixed Income. The intent is to invest that in Intermediate Treasuries, Tips, and Stable Value, as these come pretty close to the Markowitz definition of a 'riskless asset', though one could quibble over the SV fund. The Stable Value fund has 6 top-rated insurers, and survived 2002-2004 and 2008/9 with no apparent issues, and the yield has been good.

My thought process is to split about a third to each asset class, all else being equal... but all else is not equal. Yields are different.

Therefore, I compare SEC yields annually to decide which is likely the best investment. The stable value yield has far exceeded the two alternatives for several years (example: Currently Int Trsy's are around 1% I think and TIPS were around 0% mid-year, and my SV yield is around 2.6% I believe (There is no SEC yield in plan documents, I am going off of run rate which doesn't change much, but is slightly declining over time.)

Since the gap in yield is so great and longstanding, I've had 100% of fixed income in stable value.

I am concerned that defaulting to stable value is shifting my risk in ways I'm not fully understanding. I know the lack of TIPS is impacting my inflation protection, but at 75% stocks I'm not overly concerned about that at the moment (and maybe I should be?) I think I'm also giving up any protection against deflation. My focus is on two questions about this process, with the top of this paragraph meant to inform your thoughts on the second question:

1. I know bond returns have a couple components, the coupon and the carry. In the long term, bond returns are all about the initial price, and the coupon. During the life of the bond, there may be carry, since yield curves vary over time and the coupon is constant. As of right now, I make no attempt to understand if I should expect a benefit from carry in an Int Trsy Fund or a TIPs fund. Is that something I can or should factor into the process somehow?

2. More generally, does my description reveal any relevant weaknesses in my thinking or approach? Does 100% stable value make sense?
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000
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Re: How to Compare Fixed Asset Investments

Post by 000 »

I don't think trying to benefit from carry or yield curve movements makes sense for a passive investor. This gets technical fast.

Stocks don't provide inflation protection over the short/intermediate term in case you're referring to that. See 1970s etc.

Given the yield environment I think I would put 100% of nominal exposure in the SV fund. That just leaves the inflation question which probably depends on to what degree you are exposed to it (e.g. do you own your own home, how much of your expenses will be covered by Social Security).
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Stinky
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Re: How to Compare Fixed Asset Investments

Post by Stinky »

If I had access to a 2.6% stable value fund, I would be all in for my fixed income allocation.

I would make sure that I was aware of any restrictions on transfers out of SV - but I doubt they’d be severe enough to keep me out of SV.
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Re: How to Compare Fixed Asset Investments

Post by Portfolio7 »

000 wrote: Wed Oct 06, 2021 8:49 pm I don't think trying to benefit from carry or yield curve movements makes sense for a passive investor. This gets technical fast.

Stocks don't provide inflation protection over the short/intermediate term in case you're referring to that. See 1970s etc.

Given the yield environment I think I would put 100% of nominal exposure in the SV fund. That just leaves the inflation question which probably depends on to what degree you are exposed to it (e.g. do you own your own home, how much of your expenses will be covered by Social Security).
Thanks for the advice. I'm not looking for inflation protection uniquely; I think I'm in decent shape as far as that goes. Holding 75% stocks and having a large mortgage are likely good enough. Per your comments, we have a mortgage for $400K at 2.5% on a home probably worth $850K or a bit more. Also $1.6M in Retirement Savings, a 2nd home worth perhaps $180K (owned free and clear. My FIL lives in it... when he no longer wants to live there or passes, we'll sell it), and finally a business that may be worth $500K or so by traditional industry valuations (but it's a fickle market.)
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Re: How to Compare Fixed Asset Investments

Post by Portfolio7 »

Stinky wrote: Wed Oct 06, 2021 10:12 pm If I had access to a 2.6% stable value fund, I would be all in for my fixed income allocation.

I would make sure that I was aware of any restrictions on transfers out of SV - but I doubt they’d be severe enough to keep me out of SV.
Yep, it seems like an easy decision when you only look at the yields. I don't have any restrictions on transfers in or out of the SV fund, it's remarkably flexible. I used to have a trading limit of once per month across my portfolio, but even that has been lifted, and the SV fund has no unique restrictions. Plus, I don't trade except to rebalance now and then, so I'm not concerned.

Basing FI AA all on SEC yield seems simplistic, but it seems to be the majority opinion; I appreciate your contribution. I guess the time to reconsider is when the yields approach equivalence, whenever that is.
"An investment in knowledge pays the best interest" - Benjamin Franklin
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