How would your portfolio withstand a 20% decline otherwise known as a bear market? In the first decade of this century we have had four bear markets. So far, so good in the second decade of this century. But it’s worthwhile taking a stroll down memory lane decade by decade to gauge their frequency. As you can see, beginning in 1960, every decade has had at least one bear market. Think about the environment during each decade. What were the geopolitical risks abroad? What was the economy like? And what was Washington, D.C. up to? Makes one wonder what’s in store does it not? … [Read more...]
Caution! The Dangers of an Unbalanced Portfolio
If you’re readying for retirement make sure you understand the concept of counterbalancing—you’ll avoid the big losses. And your retirement will be much more enjoyable. Here is are two examples of five-year periods where counterbalancing worked well in the good times and bad. I’ve used the Vanguard Wellesley fund as a counterbalance proxy compared to the S&P 500 for an all stock proxy. As you can see, with a counterbalanced approach you can have your cake and eat it too. … [Read more...]
Once in a Lifetime Stress?
You need to check out this stress index. The Kansas City Financial Stress Index is a monthly measure of stress in the U.S. financial system based on 11 financial market variables—including the high-yield bond/Baa spread, volatility (VIX), and the correlation between returns on stocks and Treasury bonds. As you can see in the chart below there’s not a lick of stress to be found. It’s like sailing in a light puff of wind on a Summer afternoon here in Newport, RI. But light puffs of wind don’t last forever. There’s a reversion to mean coming that's more like the 15-20 knot wind on a … [Read more...]
Stop Losses Don’t Work
Enough with the stop losses. They don’t work for the average investor. They sound good on paper, but most investors don’t watch the market all day long. And that’s where part of the trouble begins. A stop loss puts a sell order at a set price for a stock. But here’s the problem. If you’re out golfing, there could be a flash crash stopping you out and not re-buying on the way back up a minute or two later. Had you been watching the market you would have realized it was a technical problem and not a crash. The other problem is when the market does have a major crash and there’s blood in the … [Read more...]
5.1% Yields Near Record
You need only follow the money flowing into junk bonds to see how investors are reaching for yield. Over the 16 month period ending in April investors added $8.8 billion to junk bonds—$5.4b of that was added in the first four months of this year. Meanwhile the yields investors are reaching for are at some of the lowest levels in recent history. The spread between junk bonds and U.S. Treasuries was only 3.4 percentage points in April, a post-financial-crisis record according to Barclays, but still higher than the 2.32 percentage point low set in 2007. Investors need to know that junk-bonds … [Read more...]
Trading Volume Way Down
Trading volume is way down as investors lick their wounds from a brutal tech and healthcare sell-off this Spring. For those of us who don’t participate in heavy trading, it has been a beautiful Spring. It’s fun being able to stay above the fray and collect dividends. And it’s no surprise that hedge funds were in the middle of this latest mess. The WSJ has more on the lower trading volume here : Still, some fast-trading hedge funds have pulled back after suffering big losses in this spring's collapse of richly valued, young technology stocks. Frenetic trading in those shares boosted volumes in … [Read more...]
Kaboom! Go the Dividends
The Federal Reserve has destroyed the portfolios of savers with zero percent interest rates. But investors have loaded up on risk by reaching for yield. That's a mistake. Dividend paying stocks with too-good-to-be-true yields have taken a hit. High yields are good, but there needs to be a viable business to support the cash needed to pay the dividend. Some yields are high because the stock prices are down. Do your homework or let us help you. Our dividend-centric Retirement Compounders can do the heavy lifting for you. … [Read more...]
A 50% Loss
Most investors have forgotten what 2008 felt like. The numbers were not pretty, especially for those who took a 50% loss. Dick Young explains in his March 2014 Intelligence Report. It's impossible to have it all ways. In order to craft an investment portfolio that can act as an all-weather armadillo, you must be willing to forgo potentially substantial upside rewards to balance against the horror of a downside wipeout. If you are retired or saving for retirement in the not-too-distant future, you can easily get a knot in your stomach when you look at the basic math of downside portfolio … [Read more...]
10 Reasons to Rent
Owning two homes in retirement isn't a good idea. If you’re considering it, then I suggest renting first. Here are some good points from U.S. News and World Report to keep in mind: 1. You spend less on utilities. You still need to pay for utilities when you rent, but chances are, your utility bills would be higher if you owned a home. First, a larger space uses more energy, so you can expect your heating and cooling costs to increase. You may also have to pay for watering your yard, upkeep of a pool or utility bills that were previously included in your rent, such as water, trash or … [Read more...]
The 10 Largest Bond Funds: Part II
Yesterday I wrote to you about how the 10 largest bond funds are increasing risk by loading up on junk bonds. The only fund company of the group not doing this is Vanguard. No surprise there. Vanguard always seems to do the right thing for investors. But there’s another narrative inside this grouping of behemoths that I want to share with you today. Who is the biggest holder of junk and who will pay the price when markets turn? DoubleLine Total Return bond fund has loaded its portfolio with 28% of its assets junk rated. You may recall this beauty of a quote from its manager. He said that … [Read more...]
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