Abby Joseph Cohen: Fixed Income Headed For Trouble @VinetageFreak,
Supply and demand should work for bonds just like it is for stocks. So simply saying the inverse relationship exists is IMO not good enough. There needs to be substantial availability of higher yielding bonds of same maturity out there to meaningfully depress the prices of the lower yielding bonds.
Great point!
Some additional 'gurgitation.
An Individual 30-yr bonds doesn't act any differently in year 29 than they did in year 1. You still get your coupon...and, you eventually get your principal back (in year 30). A bond fund is a mix of 30-yr bonds which were bought at different times with a variety of yields and are blended together to provide a coupon at a relative share price. Its the movement of this bond fund share price comparison that is made with other blended bond fund that has some concerned. If rates drop, yesterdays 30-yr bond fund is more valuable in price (if you were to sell). If rates rise, yesterdays 30-yr bond fund is less valuable (again, if you sell).
If you don't sell and just live off the dividends (yesterday it was 4%...tomorrow it may move to
5%), irregardless to the bond fund's share price you have less concern about the direction of interest rates. I believe the typical fix income investor is spending down shares of their bond fund as well as spending the coupon. This may be what AJC is concerned about. If you never sell your bond shares the individual securities will eventually mature out of the 4% yields and it will be replaced with new, potentially higher yielding contracts. Selling shares is what 'fixes the price" and obviously you don't have control over other investor's selling. This could be at a loss compared to what the shares were first bought at.
This is the price of admission to get at the bond coupon in a bond fund. Price appreciation and coupon yield are what we have enjoyed for the last thirty years with bond funds. A Bond fund share price can rise and fall significantly even when interest rate move just a small amount.
I wonder if it might be easier to think of a bond fund like an annuity. If you invest in an immediate annuity you give up principal for a stream of income. Think of a 30 year bond fund or any other bond fund the same way. If you discipline yourself to only collect the coupon from the bond fund you have "an annuity" that will always have a cash value. The 'cash value" (share price) changes as a result of its comparative value to other bond funds (and their underlying coupon).
Also, if you reinvest your dividends you are nudging your cost basis lower (buying additional shares at lower share price) if that share price did indeed dropped.
Matthews View on Asia's Importance I have almost 25% of my portfolio and two-thirds of my international exposure in Asia while I'm underweight Japan and the other developed markets, so I completely agree with Matthews on this one. I own the usual suspects as others have mentioned- GPIOX, GPEOX, GPMCX, MEASX, MAPIX and SFGIX all have big if not total allocations to Asia, but I also own KGGAX, OBIOX, QUSOX, EWX, TVRVX and WAFMX which each have 30% or more in Asia. That might be too many funds but I'm not uncomfortable at all with the large allocation because the stats on all these funds in terms of P/E, P/B, ROA, ROE and expected EPS growth seem very good pretty much across the board. Since I've built several of these positions over the last couple of years as emerging markets have suffered, I would also eventually reduce holdings if and when emerging markets/these funds have higher valuations. I'd expect that could ultimately reduce Asia to less than 20% of my portfolio with pretty much all of that coming out of emerging markets when it happens.
Switch It Up This Year: Buy In May, Till November Stay FYI: "Sell in May and go away" is perhaps the oldest saw on Wall Street, but it appears there's no shortage of U.S. mutual funds doing exactly that this year.
After all, the S&P
500 .SPX has delivered a total return, including reinvested dividends, of 10.8 percent over the last six months, essentially capturing all of the average rolling 12-month total return on the index since 1990, so why not cash in?
Regards,
Ted
http://www.reuters.com/article/us-usa-stocks-weekahead-idUSKBN18M2DW
Abby Joseph Cohen: Fixed Income Headed For Trouble Reminds me of "Trouble in River City" from a favorite musical. I think the warnings about trouble in fixed income have been running now for almost as long as The Music Man.
A kid born when these "warnings" first began must be about ready to enter college today. If the fixed income was invested in longer dated bonds or high yield bonds the parents probably did well in saving for college. Equities however likely out-performed fixed-income over the past 15 years (but turned many stomachs during the '07-'09 time-frame).
I like Abby Cohen a lot. A regular on Rukeyser's old show. But if you're not aware, Abby is a perma-bull. Can't ever recall her being negative on equities. FWIW
