Interest rates are rising and do-it-yourself investors know that pushes bond prices down. The mainstream media loves this kind of story. Scaring investors is a whole genre within the financial reporting sphere. The reporting today anticipates the shock coming when investors check out their quarterly statements.
Well, actually (here's the news for the mainstream news) most investors, if interested, can go online and see their up-to-date results. Waiting for quarterly statements is last century for many investors, especially DIY investors.
So, what about bonds? Let's take the perspective of an investor, i.e. someone who invests longer term.
The index most widely used to measure bond market performance is the
Barclay's (formerly Lehman) Aggregate Bond Index.
It is an intermediate bond index and is to the bond market what the S&P 500 is to the stock market. It tracks all investment grade bonds in the U.S. with a maturity of greater than one year (once a bond comes to within a year of maturity it is dropped from the index). Thus, the index includes U.S. Treasury Notes and Bonds, Corporate issues, and U.S. Agency issues. It is the most widely used benchmark by professional bond managers to assess and report on their performance. As a point of reference, most surveys are reporting that professional, active bond managers are under performing the Aggregate Index this year.
So how has it done? The yield on the benchmark 10 year Treasury Note has had a nasty back up from 2.22% at the beginning of the year to 2.60% as of Friday's close. So what has been the impact on performance? Shorter term the fear mongers are right. Over the past 3 months the Index has had a total return of -3.55%. But for the year-to-date the return is +1.62%! Pretty good compared to what people are getting on certificates of deposit and especially on money market fund.
In fairness, the return is not great compared to inflation. Still not something to freak out about. The yield on the index is 2.36% and this will be an important return determinant of the the longer term performance.
Most often investors capture this return by using the
AGG
exchange traded fund which has an expense ratio of .06%, i.e. 6 basis points.
Also, it is notable that, just as there are many way to play off the S&P 500 in the stock market, there are many ways to buy bond index funds that will perform differently than the Barclay's Aggregate Index. There are funds, for example that focus on different sectors and funds that have much different durations.
The above information as well as much more can be found by plugging the ticker symbol AGG into
Morningstar.
You'll note at the site that there is a "performance" link which provides up-to-date performance.
Showing posts with label Do-it-yourself investing. Show all posts
Showing posts with label Do-it-yourself investing. Show all posts
Saturday, December 17, 2016
Wednesday, November 16, 2016
Can You Retire Early?
Here's a neat little chart from businessinsider "How close am I to early retirement"? Just find your income level and then the difference between your spending and saving. The answer as shown in the chart is how long it takes to build a next egg you can retire on by taking the magical 4%/year. Do this and you won't run out of money.
Simple? Yes, but useful as a general guide.
The problem is tricky as I've written several times on this blog. You've got inflation, market performance, how long you will live, medical costs and all sorts of unknowns. Some people take more comfort in getting complex analyses which produce Monte Carlo scenarios etc. To me simple is better. But it is very important to revisit the issue every couple of years at a minimum to see where you stand.
Some people target a number. For example they might have $1 million as the value of their nest egg at which they can retire. A problem here is that the number will be hit when the market is at a high point. I had a distraught individual who came to me after he had retired in 2000 and then went through the dot.com bust and had to go back to work. He then retired after the market hit a record high in 2007 and then experienced the 2008 down 37% market. Needless to say he was at wit's end!
One way to approach this is to consider 4% of 80% of your portfolio. Can you have a nice retirement off of this? It may not be ideal but would it be ok? For example, if your nest egg is $1 million then 4% of 80% (.04 * $800,000) would be $32,000. If this would be ok (combined, of course, with Social Security etc.) then you could withstand a downturn in the market.
But back at the chart, what I really like is the out front emphasis on income and sending. The gap is what is key and it is important to not get lost in the weeds with all the other moving parts!
Simple? Yes, but useful as a general guide.
The problem is tricky as I've written several times on this blog. You've got inflation, market performance, how long you will live, medical costs and all sorts of unknowns. Some people take more comfort in getting complex analyses which produce Monte Carlo scenarios etc. To me simple is better. But it is very important to revisit the issue every couple of years at a minimum to see where you stand.
Some people target a number. For example they might have $1 million as the value of their nest egg at which they can retire. A problem here is that the number will be hit when the market is at a high point. I had a distraught individual who came to me after he had retired in 2000 and then went through the dot.com bust and had to go back to work. He then retired after the market hit a record high in 2007 and then experienced the 2008 down 37% market. Needless to say he was at wit's end!
One way to approach this is to consider 4% of 80% of your portfolio. Can you have a nice retirement off of this? It may not be ideal but would it be ok? For example, if your nest egg is $1 million then 4% of 80% (.04 * $800,000) would be $32,000. If this would be ok (combined, of course, with Social Security etc.) then you could withstand a downturn in the market.
But back at the chart, what I really like is the out front emphasis on income and sending. The gap is what is key and it is important to not get lost in the weeds with all the other moving parts!
Saturday, November 12, 2016
What's Next?
Ok, so you've listened to Bogle and Buffett, you've read Bernstein and Malkiel. Now you want to get started investing in low cost index Funds. You've got numerous accounts: 401(k)s, IRAs, taxable accounts etc. You've got capital gains to think about and a host of questions on how to get going.
My suggestion is to find a Registered Investment Advisor (RIA) you can work with. This is code for "who is an adherent of the low cost index Fund approach". If you (1) have made trades and know what ticker symbols are etc., (2) can withstand volatility in your portfolio and (3) are willing to spend some time continuing to be educated on the investment process as it relates to creating a retirement
"nest egg", then you are likely a good candidate for hourly consultation or having the RIA invest for a short-term period to set the account up and then doing your own investing. From the start you save advisory fees of 1% to 2% as well as avoid high cost Funds that tend to underperform the market.
In my practice I do a session for $160. During the session we typically Skype and look at the investments, talk about goals, talk about how big the nest egg should be saved at various ages, how much should be saved, risk tolerance and Funds to be invested in. Sometimes we go over the process of rolling over 401(k)s, withdrawal strategies etc.
Many times this is enough to get the do-it-yourself investor headed in the right direction. Other times I manage assets for a short term period at a low rate of 0.4% per year. If for instance the account is $600,000, I charge $600 for the first 3 months. If at that point the client is ready to take over then that's it - no further charge. Typically, the client will schedule a session for $160 approximately 12 months later.
Some clients of course have me manage their assets on an ongoing basis. They have other things in their daily work life or even in retirement they would rather do than to be managing their assets.
Why an RIA? Good question. Because RIAs are fiduciaries and as such are required to tell you if they have conflicts of interest in regards to compensation. That is, do they get commissions from referring you to people or selling products? Many are like me and the only compensation they receive is what their clients pay them. This is the primary factor in determining that RIAs do what is in the clients' best interests!
My suggestion is to find a Registered Investment Advisor (RIA) you can work with. This is code for "who is an adherent of the low cost index Fund approach". If you (1) have made trades and know what ticker symbols are etc., (2) can withstand volatility in your portfolio and (3) are willing to spend some time continuing to be educated on the investment process as it relates to creating a retirement
"nest egg", then you are likely a good candidate for hourly consultation or having the RIA invest for a short-term period to set the account up and then doing your own investing. From the start you save advisory fees of 1% to 2% as well as avoid high cost Funds that tend to underperform the market.
In my practice I do a session for $160. During the session we typically Skype and look at the investments, talk about goals, talk about how big the nest egg should be saved at various ages, how much should be saved, risk tolerance and Funds to be invested in. Sometimes we go over the process of rolling over 401(k)s, withdrawal strategies etc.
Many times this is enough to get the do-it-yourself investor headed in the right direction. Other times I manage assets for a short term period at a low rate of 0.4% per year. If for instance the account is $600,000, I charge $600 for the first 3 months. If at that point the client is ready to take over then that's it - no further charge. Typically, the client will schedule a session for $160 approximately 12 months later.
Some clients of course have me manage their assets on an ongoing basis. They have other things in their daily work life or even in retirement they would rather do than to be managing their assets.
Why an RIA? Good question. Because RIAs are fiduciaries and as such are required to tell you if they have conflicts of interest in regards to compensation. That is, do they get commissions from referring you to people or selling products? Many are like me and the only compensation they receive is what their clients pay them. This is the primary factor in determining that RIAs do what is in the clients' best interests!
Thursday, November 10, 2016
Market Reaction to Trump
This from Yahoo Finance, "How Wall Street is trying to make sense of the stunning stock market rally"
Stock prices crashed as it became clear that Donald Trump would be elected the next President of the United States. And then they did a complete reversal to actually rally during the first trading day after the votes were counted.Just when you thought the stock market was starting to make sense, it goes ahead and does the exact opposite.The markets were supposed to get crushedAhead of Election Day, Wall Street’s stock market experts were in broad agreement that a surprise victory by Republican candidate Donald Trump would be met by a sharp sell-off, ranging somewhere between -3% to -15%. Yahoo Finance reported on this multiple times.
This is another example of the futility of trying to time the market. There also is some "recency bias" apparently going on. This is where investors give weight to what has happened in similar situations in the recent past. On this front not long ago investors saw the head fake from the Brexit situation whereby stocks dropped and then reversed sharply.
Market time at your own risk.
Monday, December 29, 2014
Bond ETF Performance (Update)
I last reported on bond ETF performance on
10/13.
Here is a year-to-date update.
Allocating the fixed income portion of invested assets has been a challenge for investors over the past few years and continues as rates refuse to rise in tandem with experts' expectations, corporate spreads widen, and international worries mount. This was especially true since the last update, as investors piled into Treasury securities and sold high-yield and international bonds.
Not long ago, investors could put the bulk of fixed income assets in an index fund tracking the Barclay's Aggregate Index and then go to thinking about the stock portion of assets. Not true in 2013, and still not true as we approach the end of 2014. Most observers continue to believe that rates will head higher, especially once the Fed starts its expected increasing of the Federal Funds rate in mid-2015.
Important dynamics in today's market are the rising dollar and the lower yields globally. For example, the yield on the 10-year German Bund is 0.56%, 166 basis points below the 2.22% yield on the 10-year U.S. Treasury! From the perspective of a European investor looking globally, an extra 1.66% in a depreciating Euro market is mighty attractive!
As you can see, the returns vary widely among the different funds. Since the last update, long duration Treasury notes and bonds have outperformed high yield instruments; and the yield curve has flattened. Note the -3.81% performance of the international high yield fund! Note, also, the payoff for being in the 7 - 10 year part of the Treasury curve at 8.45% versus 2.70% for the 3 - 7 year sector!
Unfortunately, most 401(k)s do not offer a decent selection of bond funds - you are typically forced to select from a couple. On the other hand, if you have an IRA, you have the selection available below as well as many others - another reason in favor of rolling over 401(k)s.
In general, you want to limit, to the extent it makes sense, the bond exposure of your investable assets in your taxable accounts--where they will get hit with your marginal tax rate as ordinary income--and invest your bond allocation in qualified accounts like 401(k)s, 403(b)s and Roths.
The bogey in the bond market is AGG, the Barclay's Aggregate Bond Index: it is to the bond market what the S&P 500 is to stocks. Thus, the overall market has achieved a return of 5.63% to date. Given that the Treasury portion of this index has increased in weighting over the past few years, it has been especially well positioned for a market where investors are piling into Treasury securities.
Disclosure: this post is for educational purposes. Individuals should do their own research or consult a professional before making financial transactions.
10/13.
Here is a year-to-date update.
Allocating the fixed income portion of invested assets has been a challenge for investors over the past few years and continues as rates refuse to rise in tandem with experts' expectations, corporate spreads widen, and international worries mount. This was especially true since the last update, as investors piled into Treasury securities and sold high-yield and international bonds.
Not long ago, investors could put the bulk of fixed income assets in an index fund tracking the Barclay's Aggregate Index and then go to thinking about the stock portion of assets. Not true in 2013, and still not true as we approach the end of 2014. Most observers continue to believe that rates will head higher, especially once the Fed starts its expected increasing of the Federal Funds rate in mid-2015.
Important dynamics in today's market are the rising dollar and the lower yields globally. For example, the yield on the 10-year German Bund is 0.56%, 166 basis points below the 2.22% yield on the 10-year U.S. Treasury! From the perspective of a European investor looking globally, an extra 1.66% in a depreciating Euro market is mighty attractive!
As you can see, the returns vary widely among the different funds. Since the last update, long duration Treasury notes and bonds have outperformed high yield instruments; and the yield curve has flattened. Note the -3.81% performance of the international high yield fund! Note, also, the payoff for being in the 7 - 10 year part of the Treasury curve at 8.45% versus 2.70% for the 3 - 7 year sector!
Unfortunately, most 401(k)s do not offer a decent selection of bond funds - you are typically forced to select from a couple. On the other hand, if you have an IRA, you have the selection available below as well as many others - another reason in favor of rolling over 401(k)s.
In general, you want to limit, to the extent it makes sense, the bond exposure of your investable assets in your taxable accounts--where they will get hit with your marginal tax rate as ordinary income--and invest your bond allocation in qualified accounts like 401(k)s, 403(b)s and Roths.
The bogey in the bond market is AGG, the Barclay's Aggregate Bond Index: it is to the bond market what the S&P 500 is to stocks. Thus, the overall market has achieved a return of 5.63% to date. Given that the Treasury portion of this index has increased in weighting over the past few years, it has been especially well positioned for a market where investors are piling into Treasury securities.
Disclosure: this post is for educational purposes. Individuals should do their own research or consult a professional before making financial transactions.
| ETF | YTD RET. | DESCRIPTION |
| HYG | 2.32 | HIGH YIELD |
| AGG | 5.63 | TOTAL MARKET |
| SCHZ | 5.80 | TOTAL MARKET |
| MBB | 6.16 | MBS |
| CSJ | 0.48 | 1-3 YR. CORP. |
| IEI | 2.70 | 3-7 YR. TREAS. |
| IEF | 8.45 | 7-10 YR. TREAS. |
| EMB | 6.53 | EMERGING MKT. |
| BKLN | 0.17 | BANK LOANS |
| IHY | -3.81 | INT'L. HIGH YLD. |
| PFF | 13.38 | PREFERRED STK. |
| FLOT | 0.16 | FLOATING RATE |
| BSJF | 0.48 | 2015 HIGH YLD. |
| LQD | 7.84 | INVEST GRADE CORP. |
| BAB | 16.16 | BUILD AMER. |
| BOND | 6.27 | PIMCO TOTAL RET. |
| HYS | 0.44 | 0-5 YR. HIGH YLD. |
| VCIT | 7.36 | INTERM. CORP. |
Tuesday, January 1, 2013
2012 Performance
As readers of this blog know, one of my favorite tools for explaining investments is the BlackRock Asset Class Returns 20-Year Snapshot table. It shows and ranks annual returns on various asset classes along with a 65% equity/35% fixed allocation diversified portfolio. The table shows the value of diversification, the payoff to sticking with an asset allocation through market cycles, the role of bonds in the portfolio, and probably other things I haven't thought of.
I believe it is worth spending some time with it and thinking through the implications for the do-it-yourself investor and even those seeking an investment manager. For these reasons, I like to update it each quarter.
The diversified portfolio is also a good benchmark for a lot of investors. With 35% in the Barclay's Aggregate Bond Index, it is fairly conservative and would be appropriate for many investors in their mid-30s to mid-40s with a reasonable tolerance for the ups and downs of the market. Also notable is the fact that the diversified portfolio can easily be replicated with low-cost, well-diversified exchange traded funds. The low cost isn't just in the expense ratios (shown in the table below) but also in the amount of time required to learn how to manage and then actually manage this type of portfolio.
Approximate 2012 Performance of Diversified Portfolio
To have achieved close to this return merely required holding the funds or similar funds in the appropriate weighting. For those of you using Fidelity in your 401(k), you would have achieved similar results with their corresponding Spartan funds. Vanguard and Schwab, of course, offer funds similar to those shown in the table at low cost.
The bottom line is that managing your assets isn't really rocket science! If history is any guide, you'll find that most active managers who try to time the market or pick stocks using fundamental or technical analysis underperformed these results.
Disclosure: This post is for educational purposes only. Past performance is not indicative of future performance. Individuals should do their own research or consult a professional before making investment decisions. I own, and my clients own, some of the funds mentioned.
Tuesday, May 31, 2011
Biggest Money Mistakes
I am an advocate for do-it-yourselfers. But not for those who do not know, or refuse to learn, the basics.
Some true life stories from "Financially Fit" on money mistakes;
1. Bought vacation home as an investment.
2. Too much money in employer stock.
3. Trusted pro picks and ignored fees.
4. Too risk averse for age.
5. Short-term savings in growth stock.
These mistakes are simple, but very costly, errors people make over and over and are easily preventable. A weekend reading a good investment book (for example, The Elements of Investing by Malkiel and Ellis)
would prevent most of them. No. 1 and 2, for example, are diversification issues. #3 is one that is hammered home by this site and the aforementioned book. The bottom line is most pros will underperform over the longer term and fees will eat up a nest egg. #4 is about asset allocation. The most important consideration in deriving an appropriate asset allocation is age. #5 is covered by a very simple, basic rule - if you need the money within 5 years, keep it in cash equivalents or near cash equivalents.
Again, these are errors that shouldn't be made. They are like drinking too much and driving, skating on thin ice, or driving and texting. Really, you just have to scratch your head and wonder.
To be sure, there are more difficult issues in finance. For example, how to determine the upper limit on student debt to take on in pursuing a college education or the appropriate withdrawal rate in retirement. The mistakes described above aren't in this category.
A short time ago, there was a story in the local paper about a do-it-yourselfer who attempted to hook up a gas dryer. He blew his house to smithereens and killed his wife. Please: if you are not sure what you are doing investment-wise, spend an hour with an investment professional. Avoid the silly mistakes.
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