The Big Picture for the Week of October 23, 2011

The other day I read yet another article about how to capture yield in this environment of zero percent rates. We’ve not made any radical changes to what we’ve been doing fixed income wise in the last few years as US rates have been low and generally gotten lower and the visibility for them to remain low for quite a while is pretty clear. I have not changed my belief that the US’ fundamentals argue for higher rates but market prices diverge from fundamentals all the time. A common case being made these days is that investors should buy dividend stocks instead of bonds. If you want do that just realize that dividend stocks are stocks not bonds and have volatility characteristic of stocks not bonds because they are stocks. There is a reason why most people have some sort of mix of stocks and bonds; they tend to react and behave differently. The manner in which a dividend stock may react to various factors might be relatively muted compared to the broad market but they are merely different shades of the same color. To the extent people need income from their portfolios (so not talking about the accumulation phase people) one suggestion is to add some yield to the equity portion of their portfolio. This is not a call to change the asset mix but to increase the yield of one portion. This can be done several ways but I will say I think it is easier by using individual stocks instead of funds. So with the energy sector an equalweight allocation is low double digits. That is...

The Big Picture for the Week of October 23, 2011

The other day I read yet another article about how to capture yield in this environment of zero percent rates. We’ve not made any radical changes to what we’ve been doing fixed income wise in the last few years as US rates have been low and generally gotten lower and the visibility for them to remain low for quite a while is pretty clear. I have not changed my belief that the US’ fundamentals argue for higher rates but market prices diverge from fundamentals all the time. A common case being made these days is that investors should buy dividend stocks instead of bonds. If you want do that just realize that dividend stocks are stocks not bonds and have volatility characteristic of stocks not bonds because they are stocks. There is a reason why most people have some sort of mix of stocks and bonds; they tend to react and behave differently. The manner in which a dividend stock may react to various factors might be relatively muted compared to the broad market but they are merely different shades of the same color. To the extent people need income from their portfolios (so not talking about the accumulation phase people) one suggestion is to add some yield to the equity portion of their portfolio. This is not a call to change the asset mix but to increase the yield of one portion. This can be done several ways but I will say I think it is easier by using individual stocks instead of funds. So with the energy sector an equalweight allocation is low double digits. That is...

Adding Basis Points

A reader left the following on a post the other day; ” I’m happy if I can add 100 basis points of yield above the benchmark and would be thrilled with 150 basis points “ I would be interested if you could post an analysis of why this is so. An important building block to understanding portfolio construction is that historically US markets have returned 9-10% on an annualized basis of which some portion of that return coming from dividend yield. Lately that yield has been in the neighborhood of 2%. A reasonable aspiration for a long term result would be to achieve returns somewhere close to that 9-10% which along with a proper savings rate will be most people’s best shot at having enough when they need it. Once that building block is taken to heart, time ideally is then spent on understanding the various behavioral biases that impede success. Once a little introspection is found I would then move on to understanding the big picture in the world, how and when to look like the world (the broad index that serves as the benchmark) and when not to look like the world. Also part of this can be personal assessment about how to generally navigate market cycles in a manner that allows for sleeping at night. Against that backdrop I worked through the above process to conclude broad diversification with narrow products (individual issues and specialty ETFs) looking to mostly, repeat term coming, smooth out the ride for clients over the course of the entire stock market cycle was right for me. If in a overly simplistic...

Adding Basis Points

A reader left the following on a post the other day; ” I’m happy if I can add 100 basis points of yield above the benchmark and would be thrilled with 150 basis points “ I would be interested if you could post an analysis of why this is so. An important building block to understanding portfolio construction is that historically US markets have returned 9-10% on an annualized basis of which some portion of that return coming from dividend yield. Lately that yield has been in the neighborhood of 2%. A reasonable aspiration for a long term result would be to achieve returns somewhere close to that 9-10% which along with a proper savings rate will be most people’s best shot at having enough when they need it. Once that building block is taken to heart, time ideally is then spent on understanding the various behavioral biases that impede success. Once a little introspection is found I would then move on to understanding the big picture in the world, how and when to look like the world (the broad index that serves as the benchmark) and when not to look like the world. Also part of this can be personal assessment about how to generally navigate market cycles in a manner that allows for sleeping at night. Against that backdrop I worked through the above process to conclude broad diversification with narrow products (individual issues and specialty ETFs) looking to mostly, repeat term coming, smooth out the ride for clients over the course of the entire stock market cycle was right for me. If in a overly simplistic...

Sunday Morning Coffee

This week’s Barron’s featured a three article Retirement Special Report. One of the articles was on long term care insurance, one was on an idea for a new type of TIPS and the third offered ideas about where to capture yield. Many people seem to be skeptical about all forms of insurance as am I and health care costs are extremely controversial for all sorts of reasons but these are issues that most of us do have to grapple with (if you have millions in the bank you can cope financially with a $500,000 illness). Bruce Krasting recently noted that his insurance premium was going up 25% at an annualized rate from a little over $1600 per month which is obviously a very big dollar amount these days although some folks do have a higher premium. The Barron’s article notes the costs of long term care policies going up and also because of the dynamics of the industry that some companies are getting out of the business. Long term care is tricky because it is a type of insurance you may never need but according to the article only 2/3 of seniors will need long term care at some point in their lives. Personally I am motivated to be one of the other third and hope a combination of lucky genetics (my parents are 84 and 79 and have not needed this) and a lot of vigorous exercise will do the trick. We have no control over our genes (yet?) but we can commit to exercising regularly and while I’m at it eliminating soda from our diets. The article...

Sunday Morning Coffee

This week’s Barron’s featured a three article Retirement Special Report. One of the articles was on long term care insurance, one was on an idea for a new type of TIPS and the third offered ideas about where to capture yield. Many people seem to be skeptical about all forms of insurance as am I and health care costs are extremely controversial for all sorts of reasons but these are issues that most of us do have to grapple with (if you have millions in the bank you can cope financially with a $500,000 illness). Bruce Krasting recently noted that his insurance premium was going up 25% at an annualized rate from a little over $1600 per month which is obviously a very big dollar amount these days although some folks do have a higher premium. The Barron’s article notes the costs of long term care policies going up and also because of the dynamics of the industry that some companies are getting out of the business. Long term care is tricky because it is a type of insurance you may never need but according to the article only 2/3 of seniors will need long term care at some point in their lives. Personally I am motivated to be one of the other third and hope a combination of lucky genetics (my parents are 84 and 79 and have not needed this) and a lot of vigorous exercise will do the trick. We have no control over our genes (yet?) but we can commit to exercising regularly and while I’m at it eliminating soda from our diets. The article...