I have been struggling to understand a problem that I am going to refer to as the ‘yield paradox.’ Yields for individual asset classes look low. The 10-year Treasury bond is yielding about 1.9%, and 30-year Treasury bonds are yielding a similarly paltry 3%. The S&P 500 is yielding 2.1%, which is very low by comparison to historical levels. Investment-grade corporate bond indexes are yielding less than 4% (see LQD, for example, at 3.8%). Given that the official rate of inflation for 2012 was 1.7%, these yields mean that investors are getting very little yield net of inflation. The very low yields on bonds and on stock indexes is a direct result of the Fed’s actions in holding interest rates at historical lows via Quantitative Easing. We have not yet gotten to the paradox. Continue reading
In general, I ignore the spate of market predictions that experts issue at the start of each year. There are exceptions, and after reading Jason Hsu’s outlook for this year, I am pleased to recommend it to readers. Dr. Hsu is the Chief Investment Officer at global money management firm, Research Affiliates. I found his article both insightful and appropriately skeptical of all forecasts. How can you not appreciate a money manager who starts his prediction for the year ahead with John Galbraith’s quip that “the only function of economic forecasting is to make astrology look respectable”?
I am going to mention a few of the elements of Hsu’s outlooks and add some thoughts. Hsu first examines the drivers for bonds and then equities. I will follow this structure. Continue reading
In a recent post, I presented a list of the ‘core asset classes’ that investors need in order to build portfolios that fully exploit available diversification opportunities. That article focused on portfolios designed for total return potential, the combined return from price appreciation and income generated by the assets in the portfolio. For investors focusing on building income-generating portfolios, the core asset classes are somewhat different. In this article, I present a proposed set of core asset classes for income-focused investors, along with examples of representative funds. Continue reading
One of the most important questions for investors and advisors is identifying a set of asset classes that will be considered for inclusion in a portfolio. Some people will decide that all they need or want is one broad stock market index fund and one bond fund. Others will choose to include Real Estate Investment Trusts (REITs) and commodities. There are well-thought-out arguments that inflation-protected government bonds (TIPS) are a major core asset class. It is also quite common for investors or advisors to break stocks out into value vs. growth and small cap vs. large cap. Continue reading
If you ask most investors how risky corporate bonds are compared to government bonds, or to compare emerging market stocks vs. domestic stocks, you’ll find that most investors have a sense of the relative risk based on personal experience—but nothing concrete. If you ask the same investors how risky an investment in gold is vs. the S&P 500 their answers usually get even more ambiguous.
However, in the last several years, we’ve seen a remarkable (yet largely unheralded) new source of information to help investors determine the risk level of an asset class or sector. Continue reading
September can have a back-to-school feeling on Wall Street and a couple of news organizations put out stories in recent days that take stock of investor sentiment. They highlight some trends worth watching.
In a Reuters story reporter Angela Moon looks at volatility. September is traditionally the most volatile trading month of the whole year, and Moon finds that indeed investors have stocked up on options to protect against radical gyrations. Traders tell Moon the “datapalooza” coming this week will be important to watch. Including: retail sales due on Tuesday, industrial production and capacity utilization on Wednesday, the Producer Price Index and jobless claims on Thursday and the Consumer Price Index and University of Michigan/Thomson Reuters consumer confidence on Friday. Continue reading
IBM just sold 3-year bonds at a 1% yield, providing historically-low returns to investors. This level of yield on corporate bonds has substantial implications for long-term investors. First and foremost, yields this anemic make it hard to generate reasonable levels of income from a portfolio. Granted, this level of yield is about twice what you can get with a short-term government bond index fund which invests in bonds with average maturities of 1-3 years, but this is hardly an attractive situation. Continue reading