There's a good reason that they don't call Bill Gross "The Stock King" :)
However, that doesn't necessarily mean that he and El-Erian are wrong. However, resorting to populist scapegoating hardly exudes depth of rational argument.
Let's say they are right. That pretty much leaves commodities and emerging markets as possible outperformers. That would be a rude awakening to those who feel that portfolio diversification is found entirely within the 3 x 3 box of Morningstar's US stock market. And even more so to the even less diversified US dividend growth mantra crowd.
I'm much less concerned about my nearer maturity individual HYs (now a 7 year ladder) than I am about HY funds. The funds have little alternative but to sell when shareholders sell (and buy when shareholders buy), regardless of how appropriate that is due to market conditions. That can greatly impact total return via short term price drops, while not being able to increase short term yield significantly - moves like that drive weak investors out in droves at the worst possible times.
Holders of longer maturity individual HYs (hopefully) understand the risk consequences of squeezing yield in that way.
Mythbusting: Young Investors And Bonds [View article]
There is no better teacher than experience.
For a young investor, it is good to take strong advantage of the magic of compounded returns on aggressive growth equities. They will learn more and more about aggressive growth equities in the process.
However, at some time in the future, they will need to know the techniques necessary for purchases and sales in the secondary bond market. Young investors will be rewarded by entering earlier into this arena; learning the lessons of how bond prices and YTMs vary during different market cycles.
Surely, younger investors need to select bond sectors that are appropriate for them at the the time, then they will learn the principles which will benefit them in investing in other bond sectors long into the future.
In addition to be an asset allocation diversifier, a few bonds purchased by young people help build their investment skills for a time in which bonds need to become a significant part of their in-retirement portfolio.
Continuing self-education is critical in developing sound lifetime investment decisions. Things won't always be in this low interest environment, so people shouldn't limit themselves to thinking only how to respond to today's economic conditions.
I am constantly amazed to read (usually flaming) comments suggesting 100% single asset subclass allocations at all times. Has the world gone mad?
Bank Preferreds - A Viable Alternative For Cash [View article]
I enjoyed your article. I found it especially helpful in putting the issue of buying above par into better perspective for me, though my current bank preferreds were purchased under par.
Just one point bristles the hair on my neck. The title. I see your point contrasting returns on cash and returns on bank preferreds in the opening paragraph, but I simply cannot fathom how preferreds could possibly hold the same purpose in a portfolio as cash. I even have to reach a bit to rationalize my own decision to put part of my portfolio cash into short term bond etfs. But to consider bank preferreds as even rough equivalents to cash simply escapes me.
3 Permanent Portfolios For The Long Run [View article]
I've used the Permanent Portfolio Fund for quite a few years. I consider it a truly balanced fund, unlike the vast numbers of US stock vs US bond 'balanced funds'.
It has a good use as a volatility damper and one-step diversifier on accounts. That would make it a good holding for a young person's Roth IRA at about 20-25% or so, with the rest in aggressive growth holdings. PRPFX's wide breadth of asset classes makes it IMO a better choice to dampen account volatility and provide good diversification than PERM.
Basic Financial Principles To Consider When Building A Portfolio [View article]
Lowell:
I'm interested in your statement, "Inflation protection will require holding U.S. Treasury Inflation-Protected Securities".
Certainly, TIPS are the purest way to protect against CPI growth. A priori. A TIPS holding seems to me to be protecting only the dollar amount in TIPS from inflation erosion; ie, it does not seem to be protecting other dollar amounts in the portfolio, ie other bond and cash holdings. But, I think it is also a priori that some inflation protection is better than no inflation protection.
The growth of stock holdings seems to be an inherent inflation protection for the whole portfolio. If one uses the old 11% average return from US stocks (OK, we're unlikely to have 11% stock market return this year with less than 2% GDP growth), and the approximate 2% inflation number of today, that gives a 9% real return. For simplicity, say that a portfolio is 50eq/50fixed. Then, another 2% of the real stock return could be considered the inflation protection on the fixed income holdings, still providing an average real net 7% growth of the stock holdings.
One can also include a degree of inflation protection in bond holdings by purchasing secondary bonds selling below par (with all due diligence on the financials of the issuers and the prospectus of the bonds). Given the correlation of inflation and interest rates, floating rate bonds should also provide some protection against inflation.
I see inflation as an important concern that becomes critical to the active portfolio over only very long cycles. The last serious inflation cycle was in the late '70s: that's more than 40 years ago. It seems counterintuitive to me to maintain a constant hedge against such an infrequent, though highly important, event.
I am not against TIPS, in fact they were by far my most lucrative bond buys in the depths of the late 2008 downturn. It's just that I see them as more special circumstance holdings at times of extremely low price or at times when inflation is actually growing, say above the 3.5 - 4% range. You won't get the best prices with those inflation rates, but you will get the inflation protection at the time when it is needed. The base rate yield from TIPS is generally disappointing, and is rather a drag on a portfolio except for those few and far between times when inflation is actually high.
IOW, I see good opportunities for inflation protection in holdings other than TIPS alone.
Portfolio Construction Logic: A Concrete Example With ETFs [View article]
Lowell:
I am interested in learning more about the QPP Diversification Metric and the Portfolio Autocorrelation numbers; formulas, derivations and interpretation. [Hopefully they aren't proprietary.] Might you please provide sources (web or books) you feel do this best? Or should I just google the terms?
Mortgage REITs - Take The Money Or DRIP? [View article]
You're wrong.
"NovaStar retained interests in the nonconforming loans it originated and purchased through its mortgage securities investment portfolio and was taxed as a real estate investment trust. Exposed by the subprime mortgage crisis, NovaStar ceased lending operations at the end of 2007.[6]"
Analyzing A Swensen-Faber Merged Portfolio [View article]
Thanks Lowell and Varan. Actually, I am not alluding to risk-parity calculations. I'm quite certain of that since I haven't the slightest idea what they are :) However, I am in the process of finding out. Reference to scholarly works on the subject would be appreciated.
Analyzing A Swensen-Faber Merged Portfolio [View article]
Lowell, have you considered ways to make model portfolios dynamic? Not purely in the sense of Oberuc, et al, but to create an overlying structure (not wet finger in the air, but something rigorous) of varying the % of each holding according to recent/current market conditions? [I suspect it would make it quite difficult to do your analytics under those circumstances, though.]
It's just that having an all ETF portfolio seems just so darn trade-able. And the idea of buying such a portfolio today instead of holding such a portfolio is rather counter-intuitive, with particular reference to buying 15% LT Treasuries and 15% TIPS at today's prices. It seems equally counter-intuitive to limit EM equities at 5% when they hit their next growth cycle. I know that taking this approach to its ultimate means momentum trading and no portfolio structure at all, but I'm wondering if there is a moderate and structured middle ground between rigorously holding to a hard line, absolutist portfolio definition and whitewater rafting the constant vagaries of fleeting market conditions.
Your thoughts would be appreciated.
On a micro level, may I ask why RWX and not Vanguard's VNQI, since Vanguard ETFs are so prevalent on the rest of the list?
Look what we have here. A discussion with some talking about looking at the Fed as part of the 'science of economics', while others talk about their big-picture ideological view of the Obama presidency.
Better we should try to have Steven Hawkings and Pat Robertson discuss how the universe was formed. There's a much better chance that the latter two will reach agreement before the former two.
Preparing For The Burst Of The Treasury And Precious Metals Bubbles [View article]
Usually, investment selections are made by using the brain. OTOH, the selection of gold as an investment seem to be made mostly by using the testicles.
Are Stocks And Bonds Dead? [View article]
However, that doesn't necessarily mean that he and El-Erian are wrong. However, resorting to populist scapegoating hardly exudes depth of rational argument.
Let's say they are right. That pretty much leaves commodities and emerging markets as possible outperformers. That would be a rude awakening to those who feel that portfolio diversification is found entirely within the 3 x 3 box of Morningstar's US stock market. And even more so to the even less diversified US dividend growth mantra crowd.
High Yield Is Looking Expensive [View article]
Holders of longer maturity individual HYs (hopefully) understand the risk consequences of squeezing yield in that way.
How To Protect Profits: Check Relative Strength Indicator [View article]
Mythbusting: Young Investors And Bonds [View article]
For a young investor, it is good to take strong advantage of the magic of compounded returns on aggressive growth equities. They will learn more and more about aggressive growth equities in the process.
However, at some time in the future, they will need to know the techniques necessary for purchases and sales in the secondary bond market. Young investors will be rewarded by entering earlier into this arena; learning the lessons of how bond prices and YTMs vary during different market cycles.
Surely, younger investors need to select bond sectors that are appropriate for them at the the time, then they will learn the principles which will benefit them in investing in other bond sectors long into the future.
In addition to be an asset allocation diversifier, a few bonds purchased by young people help build their investment skills for a time in which bonds need to become a significant part of their in-retirement portfolio.
Continuing self-education is critical in developing sound lifetime investment decisions. Things won't always be in this low interest environment, so people shouldn't limit themselves to thinking only how to respond to today's economic conditions.
I am constantly amazed to read (usually flaming) comments suggesting 100% single asset subclass allocations at all times. Has the world gone mad?
Bank Preferreds - A Viable Alternative For Cash [View article]
Just one point bristles the hair on my neck. The title. I see your point contrasting returns on cash and returns on bank preferreds in the opening paragraph, but I simply cannot fathom how preferreds could possibly hold the same purpose in a portfolio as cash. I even have to reach a bit to rationalize my own decision to put part of my portfolio cash into short term bond etfs. But to consider bank preferreds as even rough equivalents to cash simply escapes me.
3 Permanent Portfolios For The Long Run [View article]
It has a good use as a volatility damper and one-step diversifier on accounts. That would make it a good holding for a young person's Roth IRA at about 20-25% or so, with the rest in aggressive growth holdings. PRPFX's wide breadth of asset classes makes it IMO a better choice to dampen account volatility and provide good diversification than PERM.
Basic Financial Principles To Consider When Building A Portfolio [View article]
I'm interested in your statement, "Inflation protection will require holding U.S. Treasury Inflation-Protected Securities".
Certainly, TIPS are the purest way to protect against CPI growth. A priori. A TIPS holding seems to me to be protecting only the dollar amount in TIPS from inflation erosion; ie, it does not seem to be protecting other dollar amounts in the portfolio, ie other bond and cash holdings. But, I think it is also a priori that some inflation protection is better than no inflation protection.
The growth of stock holdings seems to be an inherent inflation protection for the whole portfolio. If one uses the old 11% average return from US stocks (OK, we're unlikely to have 11% stock market return this year with less than 2% GDP growth), and the approximate 2% inflation number of today, that gives a 9% real return. For simplicity, say that a portfolio is 50eq/50fixed. Then, another 2% of the real stock return could be considered the inflation protection on the fixed income holdings, still providing an average real net 7% growth of the stock holdings.
One can also include a degree of inflation protection in bond holdings by purchasing secondary bonds selling below par (with all due diligence on the financials of the issuers and the prospectus of the bonds). Given the correlation of inflation and interest rates, floating rate bonds should also provide some protection against inflation.
I see inflation as an important concern that becomes critical to the active portfolio over only very long cycles. The last serious inflation cycle was in the late '70s: that's more than 40 years ago. It seems counterintuitive to me to maintain a constant hedge against such an infrequent, though highly important, event.
I am not against TIPS, in fact they were by far my most lucrative bond buys in the depths of the late 2008 downturn. It's just that I see them as more special circumstance holdings at times of extremely low price or at times when inflation is actually growing, say above the 3.5 - 4% range. You won't get the best prices with those inflation rates, but you will get the inflation protection at the time when it is needed. The base rate yield from TIPS is generally disappointing, and is rather a drag on a portfolio except for those few and far between times when inflation is actually high.
IOW, I see good opportunities for inflation protection in holdings other than TIPS alone.
Your thoughts?
Portfolio Construction Logic: A Concrete Example With ETFs [View article]
I am interested in learning more about the QPP Diversification Metric and the Portfolio Autocorrelation numbers; formulas, derivations and interpretation. [Hopefully they aren't proprietary.] Might you please provide sources (web or books) you feel do this best? Or should I just google the terms?
Mortgage REITs - Take The Money Or DRIP? [View article]
Mortgage REITs - Take The Money Or DRIP? [View article]
"NovaStar retained interests in the nonconforming loans it originated and purchased through its mortgage securities investment portfolio and was taxed as a real estate investment trust. Exposed by the subprime mortgage crisis, NovaStar ceased lending operations at the end of 2007.[6]"
http://bit.ly/LoAivd
Analyzing A Swensen-Faber Merged Portfolio [View article]
Analyzing A Swensen-Faber Merged Portfolio [View article]
Analyzing A Swensen-Faber Merged Portfolio [View article]
It's just that having an all ETF portfolio seems just so darn trade-able. And the idea of buying such a portfolio today instead of holding such a portfolio is rather counter-intuitive, with particular reference to buying 15% LT Treasuries and 15% TIPS at today's prices. It seems equally counter-intuitive to limit EM equities at 5% when they hit their next growth cycle. I know that taking this approach to its ultimate means momentum trading and no portfolio structure at all, but I'm wondering if there is a moderate and structured middle ground between rigorously holding to a hard line, absolutist portfolio definition and whitewater rafting the constant vagaries of fleeting market conditions.
Your thoughts would be appreciated.
On a micro level, may I ask why RWX and not Vanguard's VNQI, since Vanguard ETFs are so prevalent on the rest of the list?
Dual Mandate, RIP [View article]
Better we should try to have Steven Hawkings and Pat Robertson discuss how the universe was formed. There's a much better chance that the latter two will reach agreement before the former two.
Preparing For The Burst Of The Treasury And Precious Metals Bubbles [View article]