The Motley Fool Discussion Boards
Investing/Strategies / Bonds & Fixed Income Investments
|Subject: Investing in Fixed-income Vehicles||Date: 5/11/2013 4:23 PM|
|Author: globalist2013||Number: 34926 of 35505|
Is buying a CD ‘investing’, or is it merely ‘cash-management’? Is buying a junk bond ‘investing’, or is it reckless ‘speculation’? Those who self-identify themselves as “conservative investors” would never buy junk bonds, right? “Far too risky” they say. OTOH, those who traffic in junk scoff at the timidity of those who buy CDs. So, who’s right? Or is the true answer, “Neither”, because “… it all depends.” ROTFL.
Maria (and you know who 'Maria'” is, who does a credible job) interviewed Ray Dalio last Fall (whom you probably haven’t heard of, but should get to know), and his reluctant forecast, dragged out of him by repeating questioning, was for protracted, muddle-though recovery, not the doomsday scenarios of Maudlin, Casey, Schiff, Celente, etc. with whom I agree. http://www.youtube.com/watch?v=SFaRazMpxcM For sure, Dalio hedges his forecast six ways from Sunday with a lot of conditionals. But the fact that he makes his argument from a lot of market history suggest that he might not be wrong, or at least that my pessimism might be overdone.
Should I take my fears of a broad market crash seriously enough that I re-orient my investing efforts, or should I give in to present complacency about the dangers some see ahead? Tough call, right? especially since trying to figure out how hedge wealth isn’t an easy job. But to that end this morning, I did a quick profile of my present portfolio to get a sense of what the problems might be. Roughly speaking, I currently holding 15% in cash and cash-equivalents, and the rest is individual bonds spread across the yield-curve and credit-spectrum. In other words, I’m pretty far from Ben’s recommended allocation of Stocks-Bonds: 50%-50%, +/-25%.
If the market does crash, the damage to my portfolio isn’t likely to be as severe as it was in the 2008-2009 correction, for three reasons. I’ve already suffered most of the losses I‘m going to suffer from positions that proved to have marginal credit-worthiness, such as Lehman’s debt. Many other financial issuers, such as BAC and GE, have been cleaning up their books by massively calling their bonds. I’ve been aggressively selling off anything I don’t want to hold in the next downturn. So, I’m pretty much prepared to hunker down if I have to and ‘ride it out'. That’s not the choice I’m going to make. When the market does crash, I’m going to sell short.
But that’s tomorrow’s worry, right? not today’s. Today, the sun is shining, and bond returns couldn’t be better. This got me to wondering how Lokicious was doing with the investing choice he made for himself compared to mine. Those of you who’ve been long-time members for this forum won’t need to be reminded of the raging debates we had over the wisdom of sticking with 'safe' investments, as opposed to taking on a judicious amount of 'risk'. The debates often became rancorous, with him calling me “reckless”. But now that I’ve got a 12-year track record of including junk bonds in my portfolio, I can quantify the sorts of risks they create.
Currently, a mere 1.99% of my positions are in Chapter 11, and the losses that can be attributed to them represent a mere 0.74% of AUM. In other words, buying junk bonds, which are a third of my holdings, imposed a performance penalty of a mere 74 basis points, or less than what many bond-fund owners are paying as an expense-ratio. OTOH, my average YTM across the whole portfolio --Chapter 11 holdings NOT excluded-- is 10.22%, or about what the average stock-investor hopes for, but doesn’t achieve, as the Dalbar’s 20-year studies of investor results clearly document.
So, who made the better choice? Those who believed Lokicious was right and thought junk bonds were too risky? Or those who took the initiative to investigate for themselves what the facts really were? Did following Lokicious’ advice double your money? Would following my example have doubled your money?
You’ll never know for sure, right? But you can do the math. Would you rather make a safe 5% per year, or a slightly riskier 10% per year? More importantly, what does investing in those supposedly safe instruments teach you about managing risk? If markets blow up again, who is more likely survive, and with less financial damage? Those whose competence doesn’t extend much beyond CDs, or those who have explored the whole credit-spectrum? So, I’d say this. “There’s smart risks, and then there’s dumb risks.” Being so fearful of ‘risk’ that you never try to find out which is which is the dumbest risk of all, because creates for yourself grief that could have be avoided. What’s the current rate on CDs? And you tell me that buying them isn’t far riskier in terms of preserving one's purchasing-power on an after-taxes, after-inflation basis than some good, honest junk on which you're going to take an occasional hit, but --on average and over the long haul of a decade or more of consistent, disciplined effort -- can offer a real rate of return?
Standard Disclaimers. If you don't know what you're doing in the bond world, then stay out of it. My comments are only meant for those who are willing to think for themselves. Will L or his camp-followers respond to this post? They can't, because the facts refute them. To attempt to avoid credit-risk is to accept inflation-risk, and the latter is far harder to manage. That's the risk they pretend doesn't exist. But go to the grocery store or gas pump and try to buy goods and services. That's why investment-risk has to be accepted, because the Fed is debasing the currency. Will inflation rise? It is already doing so, which is why the BLS is switching over to "chaining", but CD rates stay low.
|Copyright 1996-2015 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us|