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...]
Birth of a Crisis
In the aftermath of the last financial crisis, the Federal Reserve somehow managed to come away with its reputation mostly intact. Big commercial and investment banks took most of the blame for the mayhem. And rightly so. But the impetus for the crisis was born of a prolonged period of Fed engineered ultra-low interest rates. Bernanke & Co., held rates far below normalized levels in an attempt to ward off the deflation Bogeyman (just as Yellen & Co., are doing today). Investors responded by reaching for return. There was an insatiable demand for yield. With rates so low, every basis … [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...]
Are You Saving Enough for Retirement?
A basic rule of thumb in retirement investing is that you should save at least 25X your desired retirement income. Using the rule of 25, an investor who needs $100,000 in income from her portfolio must save $2.5 million to retire without the threat of running out of money. Younger investors will need to account for inflation in this calculation. Assuming a 3% inflation rate, an investor planning to retire in 30 years will need $243,000 to buy what $100,000 buys today. That means instead of saving $2.5 million to retire, this younger investor must save $6.1 million. Calculating how … [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...]
Paying it Forward?
How much more demand can low interest rates pull forward? It appears that while mortgage demand may be low (after a flurry earlier in the recovery), auto loans are going strong. But what’s interesting about these loans is that they get longer and longer. People are pulling more and more of their future incomes into the present to buy vehicles they can’t otherwise afford. It's not surprising Americans are hard pressed to afford the necessities. On the chart below you’ll see that in inflation adjusted terms, incomes peaked in 2009 and have dropped rapidly since 2007. The … [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...]
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