This from a reader;
Hey Roger -- lets talk portfolio tilting to buy market downturn insurance.
Assuming a mild recession somewhere over the near term horizon. What do you think offsetting market exposure (i.e. S&P 500) with long bonds (i.e. American Century Target Maturity 2020) instead of using a reverse index fund?
This is a good question. As a big picture, simple answer I want to get portfolio volatility way down and yield way up during some sort of rough patch for the market. The goal is to have the portfolio not really look like the market but use the yield to give clients a chance to make some money or maybe just run in place as the market goes down.
The risk to this is that the market goes up 5% in one week for no reason at all and the entire lift is missed. This is why zero exposure to equities is a very bad idea no matter how pessimistic you are.
Tools to consider in the reader's scenario are bond funds (we’ll get to maturity a little later), foreign bond funds, treasuries, inverse index funds, foreign stocks, traditionally defensive stocks, commodities (now that they are on the verge of being more accessible), foreign currency products (now that there are more of these to choose from) and maybe a couple of other things I am forgetting.
Unfortunately for the reader I’m not entirely sure for the next recession (whenever that might be) what I will think is best. If the yield curve is flat I would not want to go out as far as 14 years.
Things change obviously. I hadn’t bought any treasuries for clients for a long time. But as two year yields started to go above 4%, I began to buy for certain clients in that part of the curve. I’m sure at some point ten year treasuries will be a good buy, but not now.
For the way I look at the world there are just too many variables to give an exact this is how I will do it answer.
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6 comments:
Since bonds are a topic,what are your thoughts on GMAC SmartNotes maturing short/intermediate term?The yields are terrific.GMAC appears to be on solid financial footing.If GMAC is a spin-off, there appears to be a capital gain possibility.Or,am I missing something?
I'm not sure if you are mising something but I can tell you what I know.
A client bought some over a year ago in an account I don't manage. On one of GM's worst days, the notes got pummeled and there were no bids, meaning Schwab would not have been able to find a buyer for the client if he tried to sell.
You can decide for yourself whether that fits in with your financial goals and risk profile.
Speaking of protecting against a downside, what do you think about buying a Protected Stock? If you are willing to forgo the meager dividend offered by the S&P500, you can buy a protected stock that tracks that index and provides 100% downside protection and 100% upside potential!
Jey,
I am not a huge fan of these. you can get good content about the at protectedstocks.com. Most of them seem more complicated than they appear at first glance.
I own one that is a currency SP. I bought it below its par value and below its NAV.
That is currency though, not stocks. I would rather create a similar effect myself to capture the dividends in a flat environment.
The content on protectedstocks.com convinced me to buy a couple of these products. One was near maturity and I acquired a small amount of a blended domestic/international stock index for a few dimes over par. Probably a good experiment and would allow me to compare the prospectus to the pay-out, etc. Felt it will be a good learning experience.
Having decided that the philosophy of protectedstocks.com matched a portion of my investment objectives and risk tolerance, I then purchased a considerably larger amount of a similar product that sold below par with a maturity 6-years out. This purchase is in a simple IRA account that I had found difficult to move into my rollover IRA and trading fees are relatively high with this broker. I thought; "Let the money sit and avoid trading fees." But now I'm bummed that I locked-up the money. My problem is, I suspect, a lack of discipline.
Thanks for an always interesting discussion.
The Blogad is doing great...two thumbs up, bro..
-Ted
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