Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
When you quote like that you lose the context of that recommendation.
Here is the preceding paragraph:
"The alternative to stocks for the skittish is, obviously, fixed income. Given the inevitable increase in rates, many investors have liquidated bonds, further raising their cash balances. Rather than try to time the bond market, the solution here is to hold a ladder of individual A-rated bonds — not a fund subject to redemptions — that will mature over the next three to seven years. As this paper reaches its maturity over time, you simply roll into a similar bond at what is likely to be a higher yield. That is a better strategy than holding cash for the next seven years."
Reply to @Investor: Thanks man. I honestly missed this better punchline. Probably because I've never held a bond ladder, but will look into and see if it is indeed a practical substitute for my cash holding.
Think his "not a fund subject to redemption" point is pretty strong.
As for timing the bond market, I think I've been looking for some clarity regarding the taper. Hopefully, the recent FOMC decision starts to provide that...and, we at least to get back over the 10 month average.
Reply to @Investor: The problem with this recommendation is that this strategy doesn't yield more than cash as the author defined it, and bonds have additional risks and other issues that cash does not.
Roughly speaking, single A rated bonds in the 3-7 year year range yield 1-1/2% to 2-1/2%. Not much different from CDs, where one can find insured accounts yielding 1-1/2% on the 3 year end to north of 2% on the five year, and around 2.5% on a seven year. That is, around the same yields. For example (I think it was mentioned on MFO), PennFed is offering CDs yielding 2% on 3 years, and 3% on five and seven years.
Problems with bonds include: - discrete amounts - you can't invest an arbitrary amount; typically one buys in units of $5K; - cash drag - you're stuck with the coupon payments; the YTM assumes you're able to reinvest the interest at the bond's rate - credit risk - did I mention that CDs are insured?, - bid/ask spread - often 2-3% or more, so on a seven year bond, you're shaving off at least 1/7% (1/2 the spread over seven years as a simplified estimate).
Even liquidity isn't a win for bonds. If rates go up, you will lose big if you need the cash before the bond matures. Even if rates hold steady, there's that spread again - another 1-2% hit. And you can't get your cash immediately - you have to wait for a buyer.
(The early withdrawal penalties on the PennFed CDs strike me as typical - 90 days interest on the short end, 180 in the middle, a year on the long end.)
The Charles Shawb link below covers the reasons for holding cash along with how much of it should be held as the amount will vary based upon an investor's different needs.
Key points are as follows:
There's always a role for cash in your portfolio. How much, and what role, depends on your investment needs.
Cash and cash investments can be useful for liquidity, flexibility and stability.
While cash rates remain near zero, returns will almost certainly rise with interest rates or inflation.
Reply to @STB65: So far, I've not had much luck with bond ETFs. (And, no one has any luck with target date mutual funds.) But, very much appreciate the info on "laddered" bond ETFs. Thank you sir.
I never understood this question. What is in Cash is NOT in my Portfolio. The amount of cash in my portfolio - by my definition - is the sum of the cash in the mutual funds I own. This fluctuates.
Relatedly, is anyone pondering a contrarian bond play for the next year or three? (Meaning all bad news is overbaked in?) I was thinking of buying 10k (or something) of AOK, for example.
Reply to @davidrmoran: Difficult to predict whether it is 1-3 years or say 3-6 years or more of bond bear market (in non equity correlated bond classes, to appease @junkster).
Besides the thesis seems a bit weak to bet on. Do you mean bad news for Bonds? That would be increasing rates and improving economy making treasuries weak and that may extend for longer than 3 years. There will likely be some equity corrections with short term flights to safety but not sure you can exploit that without being a nimble trader.
Seems like either sticking to a balanced allocation or reducing the duration of the bond holdings would be prudent if one isn't an active allocator. If you want to be more active, seems like waiting for trend to get established than being contrarian would have better risk/reward. Just an opinion.
Reply to @cman: Contrarian would (for me in this situation) mean assuming most bad news is already baked into current pricing (bond indexes). AOK is a balanced allocation, only it's 25/75 or thereabouts. Not trying to time, nimbly or otherwise. (Check out AOK mix, I suggest.) This response of yours seems to me both too broad and too narrow, a little like the one to the small and value premiums, as though those are something distinct on their own with catastrophe potential over time. How do you invest if you fear selective destructions? --- buy the whole market in toto?
Reply to @davidrmoran: I am not sure I understand what you mean by selective destructions and quoting out of context in a different thread is never helpful.
Here is a broader response to what I think you are asking which will explain my position better in all situations:
There is a saying in some venture capital circles (because these tend to be male dominated and crude when drinks are involved, I have substituted for the actual euphemisms to apply to all investing)
A small bet in a big idea or a big bet in a small idea ... neither makes money.
In my experience, all investing involves three components: the strategy with which you bet, how much you are risking in the strategy and how you manage risk if that strategy isn't working out.
This applies to your whole portfolio or parts of it.
If you aren't sticking your neck out enough for an investing decision, then it doesn't matter if the strategy was good or bad or if you didn't have a plan to manage risk.
A lot of investors do this and think they are doing well meddling when just sitting on their hands with a diversified portfolio would have done equally well or better. When bet works, they feel happy and when it doesn't , they forget it because it doesn't hurt. So selective memory keeps them happy. Been there, done that.
Your caveat of $10k in a fund that is very conservative sounds like you are not sticking your neck out much and rationalizing the decision that way. So whether your thesis is correct or not or if anyone else is thinking the same isn't worth writing a post about because it makes very little practical difference one way or the other.
My answer was in the context of making a decision that has consequences (for example, the $10k is a significant part of your portfolio or someone else is planning on making a more significant move with the same thesis). Merriman's suggestion of putting all of your money in equities and for some all of it in just value or small for 30 years is definitely placing a big bet. That is the context in the other thread. This is why the responses are the same.
In such cases, the strategy and how you manage the risks are important. My thesis is that if you are a passive investor making a significant decision that matters, then creating a global and balanced allocation and staying with it is a good strategy and requires no additional risk management efforts. There are enough studies to show this works better than most meddling. So yes, buying the total market to the extent it is practical is a good thing for such investors.
But I do believe that you can be a smart and active investor and stretch your neck out away from the above that is optimal for passive investors. But you need a plan on how to act and to react in significant ways if your investment thesis on which you placed the bet isn't working any more or turns out to be wrong.
Out of all the posts I have seen on this forum so far, only @Ted and @Junkster seem to stick their neck out from the norm, the latter in asset classes used and the former in equity exposure for his age. I would bet that both of them are active in monitoring to make significant changes in their portfolio if the markets were to change as opposed to passive investors. That is perfectly fine.
Within that context, it makes sense to look at the validity of strategy as well. Your thesis that all bad news is perhaps baked in is the same as "a bottom has been reached or close to it". Labeling it contrarian doesn't make it better or worse or different. In my experience, trying to predict bottoms or tops is futile. I am more in @Junkster's camp of trend following than predicting or timing as a better approach but it requires one to be an active investor.
So, I gave three of the best suggestions based on those components of investing. If you are a passive investor, stick to a balanced portfolio rather than make bets something will happen, or if you want to stick your neck out in this particular case reduce the duration of bonds and remain passive rather than acting on an assumption of the bottom having been reached, or if you are an active trader, follow the trend than trying to anticipate a reversal and make that change when the market changes. That may be next year or in many years. No way of knowing.
Same basis of advice in the Merriman thread or in the specific case of a poster who bought EUO hoping for a reversal when the trend was down.
If you think that is too broad or too narrow, fine. I am open to what other suggestions might exist.
If your question was really the equivalent of the guy who goes to Vegas and says "I want to be a contrarian and bet on all reds and here is a whole dollar to bet on it", then it isn't worth discussing whether that idea is a good or a bad one.
Comments
When you quote like that you lose the context of that recommendation.
Here is the preceding paragraph:
Think his "not a fund subject to redemption" point is pretty strong.
As for timing the bond market, I think I've been looking for some clarity regarding the taper. Hopefully, the recent FOMC decision starts to provide that...and, we at least to get back over the 10 month average.
Hope all is well.
Have you considered Target Date bond ETFs?
http://www.zacks.com/stock/news/90436/Target-Date-Bond-ETFs-Best-or-Worst-Fixed-Income-Funds
The link discusses them, although it's months old.
The problem with this recommendation is that this strategy doesn't yield more than cash as the author defined it, and bonds have additional risks and other issues that cash does not.
Here's the current corporate bond yield curve:
http://www.bondsonline.com/Todays_Market/Composite_Bond_Yields_table.php
Roughly speaking, single A rated bonds in the 3-7 year year range yield 1-1/2% to 2-1/2%. Not much different from CDs, where one can find insured accounts yielding 1-1/2% on the 3 year end to north of 2% on the five year, and around 2.5% on a seven year. That is, around the same yields. For example (I think it was mentioned on MFO), PennFed is offering CDs yielding 2% on 3 years, and 3% on five and seven years.
Problems with bonds include:
- discrete amounts - you can't invest an arbitrary amount; typically one buys in units of $5K;
- cash drag - you're stuck with the coupon payments; the YTM assumes you're able to reinvest the interest at the bond's rate
- credit risk - did I mention that CDs are insured?,
- bid/ask spread - often 2-3% or more, so on a seven year bond, you're shaving off at least 1/7% (1/2 the spread over seven years as a simplified estimate).
Even liquidity isn't a win for bonds. If rates go up, you will lose big if you need the cash before the bond matures. Even if rates hold steady, there's that spread again - another 1-2% hit. And you can't get your cash immediately - you have to wait for a buyer.
(The early withdrawal penalties on the PennFed CDs strike me as typical - 90 days interest on the short end, 180 in the middle, a year on the long end.)
Key points are as follows:
There's always a role for cash in your portfolio. How much, and what role, depends on your investment needs.
Cash and cash investments can be useful for liquidity, flexibility and stability.
While cash rates remain near zero, returns will almost certainly rise with interest rates or inflation.
http://www.schwab.com/public/schwab/resource_center/expert_insight/investing_strategies/other_choices/what_about_cash_2.html
Happy Holidays, Merry Christmas ... and, Good Investing!
http://ak.imgag.com/imgag/product/preview/flash/bws8Shell_fps24.swf?ihost=http://ak.imgag.com/imgag&brandldrPath=/product/full/el/&cardNum=/product/full/ap/3166187/graphic1
Old_Skeet
Besides the thesis seems a bit weak to bet on. Do you mean bad news for Bonds? That would be increasing rates and improving economy making treasuries weak and that may extend for longer than 3 years. There will likely be some equity corrections with short term flights to safety but not sure you can exploit that without being a nimble trader.
Seems like either sticking to a balanced allocation or reducing the duration of the bond holdings would be prudent if one isn't an active allocator. If you want to be more active, seems like waiting for trend to get established than being contrarian would have better risk/reward. Just an opinion.
Here is a broader response to what I think you are asking which will explain my position better in all situations:
There is a saying in some venture capital circles (because these tend to be male dominated and crude when drinks are involved, I have substituted for the actual euphemisms to apply to all investing)
A small bet in a big idea or a big bet in a small idea ... neither makes money.
In my experience, all investing involves three components: the strategy with which you bet, how much you are risking in the strategy and how you manage risk if that strategy isn't working out.
This applies to your whole portfolio or parts of it.
If you aren't sticking your neck out enough for an investing decision, then it doesn't matter if the strategy was good or bad or if you didn't have a plan to manage risk.
A lot of investors do this and think they are doing well meddling when just sitting on their hands with a diversified portfolio would have done equally well or better. When bet works, they feel happy and when it doesn't , they forget it because it doesn't hurt. So selective memory keeps them happy. Been there, done that.
Your caveat of $10k in a fund that is very conservative sounds like you are not sticking your neck out much and rationalizing the decision that way. So whether your thesis is correct or not or if anyone else is thinking the same isn't worth writing a post about because it makes very little practical difference one way or the other.
My answer was in the context of making a decision that has consequences (for example, the $10k is a significant part of your portfolio or someone else is planning on making a more significant move with the same thesis). Merriman's suggestion of putting all of your money in equities and for some all of it in just value or small for 30 years is definitely placing a big bet. That is the context in the other thread. This is why the responses are the same.
In such cases, the strategy and how you manage the risks are important. My thesis is that if you are a passive investor making a significant decision that matters, then creating a global and balanced allocation and staying with it is a good strategy and requires no additional risk management efforts. There are enough studies to show this works better than most meddling. So yes, buying the total market to the extent it is practical is a good thing for such investors.
But I do believe that you can be a smart and active investor and stretch your neck out away from the above that is optimal for passive investors. But you need a plan on how to act and to react in significant ways if your investment thesis on which you placed the bet isn't working any more or turns out to be wrong.
Out of all the posts I have seen on this forum so far, only @Ted and @Junkster seem to stick their neck out from the norm, the latter in asset classes used and the former in equity exposure for his age. I would bet that both of them are active in monitoring to make significant changes in their portfolio if the markets were to change as opposed to passive investors. That is perfectly fine.
Within that context, it makes sense to look at the validity of strategy as well. Your thesis that all bad news is perhaps baked in is the same as "a bottom has been reached or close to it". Labeling it contrarian doesn't make it better or worse or different. In my experience, trying to predict bottoms or tops is futile. I am more in @Junkster's camp of trend following than predicting or timing as a better approach but it requires one to be an active investor.
So, I gave three of the best suggestions based on those components of investing. If you are a passive investor, stick to a balanced portfolio rather than make bets something will happen, or if you want to stick your neck out in this particular case reduce the duration of bonds and remain passive rather than acting on an assumption of the bottom having been reached, or if you are an active trader, follow the trend than trying to anticipate a reversal and make that change when the market changes. That may be next year or in many years. No way of knowing.
Same basis of advice in the Merriman thread or in the specific case of a poster who bought EUO hoping for a reversal when the trend was down.
If you think that is too broad or too narrow, fine. I am open to what other suggestions might exist.
If your question was really the equivalent of the guy who goes to Vegas and says "I want to be a contrarian and bet on all reds and here is a whole dollar to bet on it", then it isn't worth discussing whether that idea is a good or a bad one.