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. (more…)
Posts Tagged ‘Monte Carlo Simulation’
Posted in Asset Allocation, Bonds, Dividends, Risk, Stock Investing, tagged Corporate Bonds, junk bonds, Master Limited Partnerships, MLPs, Monte Carlo Simulation, mortgage reits, Municipal Bonds, Quantitative Easing, Treasury bonds, yield paradox on January 31, 2013 | 2 Comments »
Posted in 401(k), Asset Allocation, Commodities, Diversification, financial planning, Investors, Retirement, retirement income, retirement planning, tagged 4% rule, IRAs, Monte Carlo Simulation, probability of failure, Quantext Portfolio Planner, TIPS, ZVI Bodie on November 23, 2012 | 1 Comment »
The question of how to safely generate income from a retirement portfolio is one of the most challenging in financial planning. In the days when people had traditional pensions, their employers simply promised them a constant inflation-adjusted income for the duration of their retirements. As we have moved away from traditional pensions and into self-directed savings plans such as 401(k)’s and IRA’s, investors and advisors must create their own customized income plans. New research from Morningstar highlights what appears to be a better approach to creating a stable income stream from an investment portfolio. (more…)
Posted in Active Investing, Asset Allocation, Diversification, Dividends, financial planning, Personalization, Regular Investing, Risk, Stock Investing, Volatility, Wealth, tagged defensive stocks, Defensive Strategy Folio, Low-Beta, market volatility, Monte Carlo Simulation on September 19, 2012 | 4 Comments »
About four and a half years ago, Folio Investing launched an equity (e.g. stock) portfolio that focused on reducing the impact of market volatility. So-called defensive stocks are those which tend to be fairly insensitive to the mood of the market as a whole. Conventional wisdom suggests that demand for band-aids, electricity and paper does not go up when the market is exuberant, but neither does it collapse when the market swoons. The conventional wisdom also suggests that these stocks will tend to under-perform the broader market during rallies and, over the long-term, that a portfolio of these stocks will deliver modest returns. Our research suggested, however, that it was possible to create a portfolio of defensive stocks that would provide returns to keep up with rallies in the broader market, while still substantially reducing the impact of market volatility. Folio Investing launched the Defensive Strategy Folio that incorporated this research on February 28, 2008. (more…)
Posted in Asset Allocation, Diversification, Dividends, ETFs, financial planning, Long-term investing, Market Outlook, Markets, Retirement, retirement income, Risk, Stock Investing, Uncategorized, Volatility, tagged Barrons, Income Investing, Monte Carlo Simulation, volatility, yield on December 2, 2011 | 14 Comments »
With ten-year Treasury bonds yielding around 2%, many investors are looking for investments that can provide higher levels of yield. Barron’s just ran a cover story on this topic, titled:
“How to Get Safe Annual Payouts of 7%: Despite rock-bottom interest rates, you can still earn investment income of 7%-plus per year. How to keep money flowing during retirement.”
But is it really possible to create a low-risk portfolio with a yield of 7% or more? (more…)
Posted in Retirement, Tools, tagged asset allocation, bond investing, Monte Carlo Simulation, online financial tools, portfolio, Retirment Income Calculator, stock investing, T. Rowe Price, VFINX on December 3, 2010 | 2 Comments »
There are quite a range of financial planning tools that attempt to shed light on the question of how much money one should save for retirement. Among the free online tools, I feel that the very best is the Retirement Income Calculator developed by T. Rowe Price. Called the RIC for short, this tool won the 2009 Mutual Fund Education Alliance Star Award for Best Retail Online Innovation.
I have followed the evolution of the RIC for years, and the latest generation of the tool is remarkably intuitive and easy to use.