Susan Byrne offered an interesting take on fixed income investing, who managed Westwood Balanced from 1991 - 2012, was less flustered by low bond yields than were others. She argued that "the role of high quality fixed income is not to make you money, it's to hedge deflationary environments where everything else is falling. It provides liqudity and, quite frankly, sanity" during down markets and should be appreciated for those contributions, not be adding alpha.
For what it's worth,
David
Comments
Thank you for the posts and keeping us on the front lines, too.
I will provide a "yup" to Susan Byrne's statement; and add that one should not be flustered with low yield bond funds that are attracting money; at least, as of today. We will know about tomorrow and the next days as they arrive.
Regards,
Catch
Finding Dividends in Health Care and Energy
Westwood's Susan Byrne says the shop's funds have balanced lower-volatility health-care stocks with inflation-resistant energy names, while banking on a good history of dividend increases in both sectors.
http://www.morningstar.com/Cover/videoCenter.aspx?id=557702
I've always heard you need your fixed income to return in the 6% range. Past equity returns have historically been ~ 10-11%. In a 60:40 balanced portfolio you could expect average portfolio returns of ~8-9%. Granted, many (including myself) believe equity and bond returns will be lower going forward, but you get the drift - fixed income has to give you some return on your investment. It's not just a place-holder for stability.
Now if you except what Fuss and Hasenstab said recently in a interview with M*, you will have to take extra risk to get returns from the fixed income side of your portfolio. If you don't you would have to take that added risk on the equity side, wouldn't you? Returns don't come without risk. Heck, investing in LSBRX and TGBAX is adding risk to a fixed income portfolio, but risk worth taking by my 2cents.
Fuss and Hasenstab interview:
http://news.morningstar.com/articles/article/557172/on-the-go-for-fixed-income.aspx
You noted: " As part of a balanced portfolio using bonds to lower volatility, don't you have an expectation for returns?"
I believe to understand that her statement leans towards current protection during erratic equity markets. One would suppose to the point, that even if yields in IG bonds don't move around too much, that the monies would be fairly liquid and at least retain value. If she is more of a "bond" person, she may be seeing more rough equity waters ahead.
I will note, not that others are not unaware of or have not seen this during conversations among those on tv and in article writes; that, there are those in the equity and the bond worlds of investments that do not cross the lines of what they see and find to be correct going forward. Mostly by chance, I have heard the answer to the question; "Do you invest in "x" at all?" Reply, "No, I don't invest in equities or bonds."; depending on the person's leanings for investments. Both worlds will product excellent profits if the person is skilled and especially if they use the other tools available to "adjust" their holdings.
Our house had been a 90% equity house from 1979, until June of 2008. The transistion among the equity bumps here and there (March 2009-today) to bonds has been an interesting journey. The transistion may have happen to some extent; as retirement is just around the corner, but avoiding most of the market melt and moving to bonds opened the door much sooner.
At the very least, we have become more diversified in our knowledge and thinking about investments.
The big work is picking apart the numerous sectors that are the equity and bond worlds; and finding the comfort zone of blend for the risk and reward.
Note: our cash is in bond funds, versus MM accts. And we do expect to earn a few bucks from any of our bond fund holdings.
Take care of you and yours,
Catch
On the blended stock-bond portfolio return question, I like Catch's take so much I'll repeat it here:
"The big work is picking apart the numerous sectors that are the equity and bond worlds; and finding the comfort zone of blend for the risk and reward."
Amen, bro'.
Edit: It may pay to remember that bonds overall are not a monolithic asset class; here Byrne is talking about high-quality bonds.
While $1 gas may sound enticing, I feel that deflation is a much worse scenario than inflation, and most people would not be able to live with $1 gas. That would mean a totally dead economy - no products being moved, no jobs, and people unable to afford gasoline even at that price. Not that they'd need it - they wouldn't be going anywhere.
We've had a small taste of deflationary assets with the bursting of the housing bubble. Did wonders for consumption and the economy
- Feeling poorer (again, look at how people reacted to housing price declines)
- Likely unemployed and needing to conserve assets
- Waiting for prices to drop even further (the opposite of inflation, where people run out to spend before prices go up)
Some bond holders would lose out as well. With the economy failing, defaults would shoot up. And that appreciation on TIPS? You'd be giving it back, losing value.
I'm really not into doomsday scenarios, but that $1 gas suggests one.
I prefer to think of bonds (and cash) not so much as hedges against this sort of deflation, but rather against short-to-midterm volatility when one does need cash. An old rule of thumb is not to invest money that you'd need within 5 years, and not to invest in equities with money you'd need in less than 10. That's your "hedge" against deflation - not needing to sell assets at a time where they are _temporarily_ devalued.
Which is also why I think that doing asset allocation by age doesn't work - it's a matter of what you need to spend, not how old you are. If you're spending 4%/year, then a 60/40 split (10 years worth of bonds/cash) works fine. But if you're spending more or less, then the asset allocation shifts.
Your comments on balanced returns is interesting and believable, but somewhat depressing. Five years ago, I can remember inputting 8% return into those retirement calculators. Recently as I get closer to retirement, likely by my employers call, I've been using 6% as a factor. Your 4-5% is probably a better factor to use in planning, just to be safe rather than sorry.
Thanks for the input.
http://www.consumerenergyreport.com/2012/03/14/charting-the-dramatic-gas-price-rise-of-the-last-decade/
Interesting chart. I knew we broke the 50c barrier in the '73-'74 OPEC embargo (even/odd gas days), and broke a buck in the '79 oil crisis (2 hour waits for gas). But I did not realize that gas prices effectively plateaued for decades.
2009-11 Cds ( 6 months) were paying .87%,.46%,.42%.
If per say I had $1000 in saving account in '68 I could use the interest to buy ($45 / .35 = 130 gallons. How much would I need to save from '68 to present, to use the interest to purchase 130 gals at todays gas price of $3.40 ??? Would $220 -230 k be enough? If I were to take gas mileage into the equation I'm guessing I'd need $2000 back in 1968....... My head is starting to hurt...
Have a good weekend All
Don't know about gas prices vs. rates of return (and am not curious enough right now to research it), but I did just read about the Pizza Connection: Since 1960 the price of a slice of pizza has closely tracked the price of a subway ride. So if you held onto a token (no longer used, alas), you could always swap it for a slice, even up.
Apparently this has been known (though not by me) for a long time. Here's a 2002 article attributing the discovery to a 1985 op-ed piece. And a 2005 column attributing it to a different "discoverer" in 1980.
All links are to NYTimes articles.