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Post by sd on Jun 4, 2017 10:18:52 GMT -5
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Post by sd on Jun 5, 2017 18:36:52 GMT -5
Article from Investiv Daily suggesting that Bonds and stocks are both Risky going forward :
By Sven Carlin on June 5, 2017
Defensive investments are usually promoted to those in retirement or close to it. However, we should all always be defensive investors.
Neither bonds nor general stocks are defensive investments, no matter the diversification or quality of the bonds.
Cash is the only defensive investment in this market. Other options are positive asymmetric risk reward investments.
Introduction
Many will say that a portfolio owned by an investor who is about to retire or is retired should be a defensive one. However, I find focusing on age isn’t smart because no matter our age, we have to always protect our portfolio and try to maximize returns. After all, isn’t the first rule of investing to never lose money while the second rule of investing tells us to read rule number one again?
The mutual fund marketing machine constantly promotes the “buy and hold for the long term” investment approach and describes market timing activities as a loser’s game by constantly telling us that markets cannot be timed.
In light of the above, I’m first going to describe what should be understood under the word ‘defensive.’ Secondly, I’ll analyze whether we should all have a defensive portfolio now, and if so, how to build one.
Who Is A Defensive Investor?
A defensive investor is one who is first and foremost interested in safety. In Benjamin Graham’s book, The Intelligent Investor, a defensive investor is also described as a passive investor who wants freedom from bother. However, as you’re reading this, you are clearly ready to put some effort in and take the responsibility to protect and increase your wealth.
So if a defensive investor is one who wants safety, thus doesn’t like losing money, I’ll deduce that we should all be defensive investors.
Apart from the irony, the fact is that we should all indeed be defensive investors. If you can separate your investment thinking from the paradigm that only high risk leads to high returns and vice versa, you appreciate a defensive approach even more. I’ll dig deeper into this the risk return paradigm tomorrow, so watch for that.
How To Be Defensive In The Current Environment
If you’ll retire in 10 years or you have just started to invest, not losing money helps in both circumstances.
The standard opinion is that a defensive investor should limit their volatility by owning more bonds than stocks. Well, unlike many might think, this makes a portfolio extremely risky.
Given the low interest rates, bonds are at historically high levels while even high yield bonds have historically low yields, so bonds aren’t going to save you from disaster if we see inflation or higher interest rates. Usually the thing with bonds was that an increase in interest rates compensated for the loss in value. This worked when bond yields increased from 9% to 11%, but it doesn’t really work when yields go from 2% to 4% as it would take more than 20 years for the 2% yield increment to cover for the loss in principal.
Figure 1: The 10-year Treasury yield is still extremely low. Source: FRED.
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The situation is similar for stocks. However mutual funds are right, if you own the S&P 500 and your investment horizon is 30 years, the possibility for capital losses is really minimal as there will be dividends coming every year and corporate earnings will likely grow. Therefore, the S&P 500 will be much higher than the current 2,400 points in 30 years. This notion is fundamental to the mutual fund industry as it’s a relative truth and protects the industry from attacks in case of bear markets following irrationally overvalued markets.
However, I would like to add the concepts of expected returns and opportunity costs to the above paradigm as I don’t think many will be happy with what the current S&P 500 offers for the long term and even less happy with the short-term outlook.
Currently, the S&P 500 has an earnings yield of 3.92%. If I attach an expected earnings growth rate of 2% per year, given that the U.S. economy is expected to grow around 2% in the long term, the earnings yield in 30 years will be 7.1%. This means that a person who invests now in the S&P 500 can expect an average nominal return of 5.51% for the next 30 years coming from stocks ((7.1+3.92)/2=5.51%).
This is what I can tell you for the next 30 years. If we shorten the horizon to 20 or even 10 years, the picture changes completely. The FED has clearly said it is going to start tightening. As it usually takes more than a year for changes in monetary policy to affect the economy, we should slowly start feeling the consequences. This means that interest rates will go up, bond yields too, and expected stock returns will also be higher. In case of stagflation, the S&P 500 and most other financial markets would be really toasted.
So if interest rates go up, you can easily expect a 25% or higher decline in bond values, depending on what kind of bond you’re looking at. Consequently as government bonds are riskless, the expected return from stocks should also go up and stock prices should decline.
To summarize the situation, the 10-year treasury yield is 2.21% and it carries the risk of an easy 20% decline if interest rates increase by a few percentage points. The opportunity cost is that you will be soon be able to buy bonds much cheaper and with a higher yield.
As for stocks, their yield is 3.92%. Given there is no maturity on stocks, the discounting is heavier if interest rates increase. So stocks currently yield 3.92% and carry an easy 50% decline risk.
Defensive?
So if both stocks and bonds have a negative risk asymmetry, and the risk is much higher than the reward, where should you invest?
Well if you like stocks and bonds, the answer is obvious, cash. It’s highly unlikely that you will miss on much as long as stocks trade at a valuation of 25.5 and bonds yield 2%, especially as this is the case after an 8-year period of economic expansion. By cash I also mean short term riskless investments like T-bills as long as you keep them until maturity.
Having lots of cash will allow you to buy bonds with higher interest rates, those will come sooner than you might think as the FED is constantly telling us about higher interest rates and a smaller federal balance sheet. The same will apply to stocks as higher interest rates will work like gravity on valuations.
Apart from cash, which is the only real defensive investment in this environment, a small part of the portfolio could be allocated to investments that offer much more upside than the S&P 500’s 4% yield at the same, or even less, risk. I’m talking about investments like emerging market stocks, high growth stocks with stable prospects, miners, and other kinds of alternative investments. Keep reading Investiv Daily to learn more about such investments.
No Comments » | Filed under: Bonds, Cash, Emerging Markets, Interest Rates, Investiv Daily, Stocks | Tags: No Tags
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Post by blygh on Jun 30, 2017 18:32:35 GMT -5
| RIDER | 6 MONTH GAIN | | SD | +0.6473% | | BLYGH | +5.9268 | | TIARRA | +6.98% | | SPIDERMAN | 12.476% | | IRA | -2.87% | | REAL DEAL | NO ENTRY | | SPY | +8.48% | | QQQQ |
+19.50 |
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Post by sd on Jul 28, 2017 11:22:13 GMT -5
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Post by sd on Aug 19, 2017 8:56:58 GMT -5
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Post by sd on Sept 9, 2017 9:09:35 GMT -5
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Post by sd on Sept 17, 2017 7:27:44 GMT -5
us.spindices.com/indexology/smart-beta/?cmpid=0617_es_34
Link is to a series of articles on -factor investing- and multi-factor investing- Comparing the component elements of stocks within an index and looking at Value, Quality, Momentum-
in the series of different articles- The combined Multi-factor approach narrows the stock holdings down to the components that screen for the best factors- It recognizes that -over time- different factors rotate into and out of favor-Link is to a number of different articles-
I haven't yet read every article in the link- but the multi-factor article was enlightening-
Another article studies the longer term failure of active fund management to beat the underlying fund style benchmark - With the advent of low cost passive index ETF's - compared to the much higher costs of active mutual fund management- particularly over longer periods of time- This is well worth a review if one is paying advisors that put them into actively managed mutual funds.... When one considers the costs of active management are deducted from the Investors total return, and overall fund underperformance- this should be worth one's attention...
us.spindices.com/indexology/core/spiva-us-year-end-2016
fund screener-http://us.spindices.com/index-finder/
A link to Betterment.com incorporating GSachs factor fund - Note that Betterment is about very low cost Investing for the DIY er.
www.betterment.com/resources/inside-betterment/product-news/smart-beta-portfolio-strategy/
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Post by sd on Nov 18, 2017 11:10:36 GMT -5
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Post by sd on Nov 26, 2017 11:30:55 GMT -5
lEARNING FROM hISTORY- RAY DALIO- After 1:00 hr talks about 40% of jobs being displaced- , Financial engineering- Fed- must be cautious in raising rates etc
commentary about Algorithms- crypto currency-classic bubble-due to present speculation- future potential... etc.
www.youtube.com/watch?v=i5LqCAtNJJ4
Ray Dalio- TED investing
www.youtube.com/watch?v=jVwna1aO3Dw Talking to the investor-Diversified portfolios
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Post by realdeal on Dec 17, 2017 11:25:54 GMT -5
I'll play this time in the coming year... my 5 are listed below
AAPL
OSTK
WPM
CELG
MRK
If explanation is needed on why let me know
-rd
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Post by blygh on Dec 30, 2017 10:32:04 GMT -5
Race over Spiderman the winner of the Year long with a 24.68% gain -
Tiarra 2nd
Blygh 3rd
SD 4th
Ira 5th
Real Deal no entry
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Post by sd on Dec 30, 2017 12:44:26 GMT -5
Congrats on the Win Spiderman! and to the other's net gains! Here's to next year!
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Post by blygh on Dec 30, 2017 18:03:13 GMT -5
| RIDER | 12 month return | | SD | +9.442% 4 | | BLYGH | +11.16% 3 | | TIARRA | +11.67% 2 | | SPIDERMAN | +24.68% 1 | | IRA | +6.157% 5 | | REAL DEAL | NO ENTRY | | SPY | +18.51% | | QQQ | +30.22%
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