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With stock valuations high and bond yields low ... Where is the best place to put new money?

edited August 2020 in Fund Discussions
In looking at stocks. Pulling data form a couple of my barometer feeds I'm finding that the blended P/E Ratio for the S&P 500 Index computes to 26.1 along with it's yield being found at 1.76%. For me, this indicates that stock valuations are streached by some of the metrics that my late father used and scores stocks as overbought.

In looking at bonds. I'm finding that the yield on the US10T is 0.64%. I'm wondering what folks are thinking? That is better than what my money market funds are paying but it is still very low by historical standards. By my late father's standards this indicates that US Treasuries are extremely overbought.

With the above in mind I'm wondering where investors are putting new money to work? For me, I have increased the allocation I have in my income funds from 40% to 45%. My income sleeve has a yield of 4.23% and my hybrid income sleeve has a yield of 3.58%. Within my asset allocation model I am aleady overweight my income area by +5% so no more room to expand there.

This leaves 15% of my cash in low to no yield places such as money market mutal funds and cash savings. My highest paying money market mutual fund PCOXX has paid out a measley yield of 0.53%. Carry this out and for the full years it projects to a yield of less than one percent.

With this, I ponder ... What to do in my quest for better returns with some of my cash as it builds?

Option 1) Sit tight and build cash while I await the next stock market dip (or pull back) where I can put an equity special investment position (spiff) into play. Generally, in the past, I'd look to make at least five percent off my spiffs when engaged. For me, this will work.

Option 2) I can buy more of my commodity strategy fund (BCSAX) which has a yield of better than 2% and as inflation rises usually the price of commodities rise. This fund holds some gold and gold mining stocks as well. It should do well if the US Dollar continues to decline and the price of commodities rise. For me, this will work.

Option 3) I can buy more of my real estate income fund (FRINX). As the US Dollar declines generally real estate values increase plus long term this would act as a hedge against inflation. Woops already have a full allocation to real estate and high yield securites. No go here.

Option 4) Buy more of my convertible (FISCX) and preffered (PFANX) securities funds. Hold up ... already have a full allocation there.

Option 5) Buy more in my asset allocation funds and let my fund managers find opportunity. This would also work because it would spread the funds's asset mix among those I'm already invested in thus maintaining my asset allocation. Two funds that I'm thinking of are CFIAX & INPAX.

So, for me, going forward, over the near term, it looks like my better choices are numbers 1, 2, & 5 of the options I covered.

I am also wondering what you might have thought of and where you might be positioning new money in this low yield environment?

Thanks for stopping by and reading.

Take care ... be safe ... and, I wish all "Good Investing."

I am ... Old_Skeet

Comments

  • Howdy,

    I am a big believer in dividend paying stocks that I do business with. T is paying 7%. Check your utilities. When you pay your monthly bill, you're paying yourself.

    Rono
  • Hi @rono.

    Thanks for pointing out equity income.

    I agree equity income is a good place to look in this low yield environment. For me, I've got a full house in equity income funds. Three equity income funds that I have with their yields better than three percent are EADIX, IDIVX & SVAAX ... and, they pay monthly.

    With this, I need to keep looking for another avenue.

  • edited August 2020
    I think ... I'll put in a ping for @VintageFreak. I think he was doing something with options and futures. I wonder how this is working out? Perhaps, he will check in an advise and tell us more about his strategy.
  • Futures and options. Well, not for me, but.........you probably don't have any of these in your portfolio:

    WEEK/YTD AUG 22

    --- LTPZ = +1.9% / + 22% (UST, long duration TIPs bonds
    --- TLT = +1.9% /+23.8% (20+ Yr UST Bond
    --- EDV = +2.5% / +31.6% (UST Vanguard extended duration bonds)
    --- ZROZ = +2.8 /+33.5% (UST., AAA, long duration zero coupon bonds)

    WARNING: Hot potato area of bonds.
  • edited August 2020
    Hi @Catch22,

    Thanks for making comment. In the long duration area my muni fund FLAAX comes into play. Other than that you are correct I do not have any long duration bond funds. I'll give your suggestion some thought. Old_Skeet
  • edited August 2020
    Hi sir...what are your thoughts about more junks bonds or small portions in good companies like att binds or deltair airline bonds/ford. More risks but more rewards.


    We bought kohl's bond 24 months ago, they are asking us to consider give them options and calling them. Personally I think we are /maybe start of new bull market. We are in same boat thinking what to do w new monies. We owe lots taxations so lucky those bonds partly called so would prob will pay w these restore new monies to taxes



    As stated before been buying Fidelity 2020, JNK and more bonds indexes in Mama retired portfolio. These are good long term sustainable vehicles for med long terms and capital preservations IMHO.. unless economy miraculously turn around extremely quickly and rates are set higher...I did read somewhere Feds likely to keep rates low for quite awhile so could be good for 12 24 months w these bonds. Think she has > 60s% bonds and very little equities

    You can also look at corp bonds at schwab, all BBB rated or higher,, won't bankrupt but yields could be low 3 4 % (but could be much better than cash and at pars at what you are doing)...probably best continue Dca into those vehicles that did work out for you longer terms. why fix when its not broken?


    Whatever you do could be good because you do have many options currently
  • Hi Skeeter,
    1. The next dip will be fast. I think it will work, but be quick because the dip-watchers will be buying. Have a plan now.
    2. Will work if, as you say, things go as planned.
    3. Real estate is a no go for me. Also think bankruptcies and defaults ..... it's too early yet.
    4. How bad do you want to invest? Please be an American. More is always better. Planes, tanks, ships, missiles......haven't you learned that yet? lol......
    5. CFIAX - is not something I would add to value and low quality bonds. Why is the market going to change soon to make this good? Also, has no cash in my opinion. INPAX would be a better choice, just me saying. Better quality.....it's what you want with what's coming. You, the one with so many funds.....why buy now? You're being a Robin Hood-er, bro'.

    XXXXXXXXX ......uh, that was the Dukester. I can't get a cold one without his causing a problem. What did he say?

    You're dealing with an ocean of money. Wherever you go, it's been bought already. So his advice is to get some good whiskey .... the sipping stuff..... and relax for awhile. It's not time yet for this. The Brown One ......if he weren't a dog, the things he might do.
    God bless
    the Pudd

  • @Old_Skeet and @Puddnhead, if a dip does come, do either of you have a level for the S&P at which you could consider it a buying opportunity? I am trying indeed to get a plan...
  • I am also in a quandary. I don't see Covid disappearing and I think it will cause at the best a "W" recovery. While these extremely low interest rates do sorta justify the sky high PEs we are seeing, I am always leary putting more money into equities when valuations are stretched like this. We ( SP500) are at tops not seen since the dot.com bust ( But back then the 10 year treasury was yielding what 5%?)

    The additional disaster is the basement low bond yields. The country might keep chugging along without inflation, but to believe this I think you have to assume there will be no economic recovery.

    At some point, either covoid will be controlled, the market will blast off and inflation with it, and bonds crater, or covid will continue the economy sputter, bankruptcies take off and the market crash.

    Thus you can either assume the worse and get a capital gain out of your Treasuries, or party on and hope American Ingenuity will beat Covid, convincingly.

    I am light on equities but don't see bonds as providing the ballast they used to and am stuck in cash.

    i have bought small amounts of blue chip dividend stocks, esp Health care, consumer staples etc staying away from REITS and Utilities, hoping to add more when the market tanks

    If I felt comfortable with options I could follow some of the strategies to profit in both scenarios without risking the nest egg.
  • @expatsp: My 2 cents worth. Take a look at the last drop & work a plan off of that. I'll add one more thing. As for myself I didn't have a plan & thus didn't get enough dry powder wet, (or invested).
    It's hard, at least for me, to keep buying into a falling market. A plan would help.
    Lastly, I hope it will be awhile before another steep decline happens.

    Stay Safe, Derf
  • Maybe put some money in bond etfs like GSY ICSH JPST BIV BOND VCIT VTC or some merger arbitrage funds like MERFX or HMEAX (ntf at E-Trade).
  • edited August 2020
    HI @johnN, I've pretty much packed the trunk in high yield at about 20% of the portfolio. A good number of my asset allocation and hybird income give me good exposure to this asset class so it no longer is a go for me to add more as a stand alone.

    Hi @Puddnhead, Yep I agree about playing the dip if it will progress into a pull back which is a decline in the five to ten percent range. I'll want to see a reading on my barometer in the 160 range before opening a spiff.

    Hi @expatsp, I usually let my barometer be my guide as when to load equities. I have found in the past a good entry point is when the barometer has a reading of 160, or better. The higher the reading the more the investment value the S&P 500 Index has over a lower reading. That's my plan 160 or greater.

    Hi @sma3. Yep, I agree on the quandary. Sometimes it is hard to just sit but sometimes if you are fully invested within your asset allocation as I am that is perhaps the best thing to do. Right now, I've got ants in my pants, looking for an opportunity and not finding one.

    Hi @Derf, One of the things that worked well for me in the last market swoon was to enter in step fasion with each buy step being greater than the previous based upon the theory that the deeper the pull back went the less risk there was in buying. I'm thinking from memory I had a total of about eight buy steps as I bought on the way down and then on the rebound until I reached my average buy in point. However, with any plan build some flexability into it.

    Hi @carew388. Merger arbitrage funds like MERFX or HMEAX is something that I have not invested in before. It is something I'll have to study up on. Can you tell me and the others that have made comment what you favor about them and how this has worked out for you. Is it a possition that can be held long term? Or, is it more of an in and out play? I'd be very interested in hearing your comments.

    Again guys ... thanks for making comment.

    Old_Skeet
  • edited August 2020
    I think you have to look at what is going on with the economy and the FED. One way out of this sky rocket deficit that the FED (and congress) may be forced to implement is to weaken the dollar. Trump has wanted this for a while now. If weakening the $ is the what government wants, it will likely happen.

    There were a couple good articles in Barrons this weak on this idea. The Barron's article suggested where to put money in the case of a weakening $; International and EM equity un-hedged, Gold IAU, basic commodities DBC, a bearish ETF that moves inverse to the dollar UDN, and an international treasury bond ETF, IGOV.

    I personalty believe the government will work to weaken the dollar. It makes sense. I already hold a substantial, for me, amount of IAU and short term treasuries, ISTB. In the same vain I may start a position in UDN. Not huge but I think that is the direction to move into.
  • edited August 2020
    Hi @ MikeM, Ecellent point on the declining US Dollar. I think that is spot on. With this, one might also consider funds that hold a good percentage in the cyclicals as they do well in a falling dollar.
  • Any non psychotic investment advisor would look at my portfolios and shutter, but I have tried to match my overall equity and risk assets to my ability to sleep at night.

    I have about 20% in equities, 10 % in other stuff ( Gold, MERFX, COGIX, TAIL ( up 8% this year)

    The rest ( 65-70%) is in ST high grade bonds and cash. I think all traditional methods of evaluating the market are out the window with Covid. The Pandemic really depends on a bunch of "Bros" at colleges not infecting each other, and not infecting the staff, teachers and grandparents

    No evidence I have seen in the last two weeks that this will not end badly
  • Hi guys,
    2 things to look for right now: first is school sales (it's the second largest driver after Christmas in the economy); and the second is: what will Congress do on its return from summer vacation? It's HUGE.
    As far as 19, I think we all know it's going to get worse as winter closes. That leads us to Christmas.....will it be good? I think so. Think online (investment thought). Also, healthcare.....no one hates it now (buy!).
    So now to where I think the market will go......higher, much higher than we all think. The other QE's also went higher than we thought. Now we have an ocean like nothing we've ever seen before, and it's still early in the game. We have TINA and FOMO with cash on the sidelines and a fed that will say how high inflation will go due to their buying. If you are going to go by the old metrics, book, PE, ROE, ROC....you will lose. Until the fed pulls or stops supporting the market, nothing matters. Should it stumble, mother will be there. They said that. As the economy strengthens and the fed put stays, I could see S&P - 4000 due to the ocean. Again, just me thinking.....
    Again, every other QE went far beyond what we thought.
    God bless
    the Pudd
    p.s. Skeeter, I don't think we're going down that far. Be quick or be dead.
  • For me MERFX and HMEAX are long term plays. If I had to pick one, go with MERFX. You can see the funds return at Schwab, including the best and worse 3 month performances. I've owned other M/A funds that worked until they didn't: GADVX GAKAX VARAX ARBFX SPABX . By the way Fidelity slaps a transaction fee on TMSRX -ntf at Schwab and Vanguard.
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