Bond Opinions

Comments on “How Big of a Concern Is the Inverted Yield Curve and Negative Interest Rates,” by Brian Haughey in the November 2019 AAII Journal:

For those of us in our 80s, this is a perplexing time. A bond ladder limited to 10 years seems to be quite useful, but the specter of having maturing bonds with no place to use the funds is certainly daunting. My personal choice is some preferred stocks and preferred stock exchange-traded funds (ETFs). This does, however, certainly raise the level of risk through time. One must strive to take small, careful steps.
—Walt Curtis from Indiana

Right now, U.S. equities and Treasury instruments are where foreign money is going. This is driving the yield curve, not an impending recession. The author, somewhat reluctantly it seems, admits that dividend-paying equities might be a safer choice, then goes on to talk about reallocating to cash instead of bonds. There is no question—cash and bonds will both lose money, and conservative equities with diversification will gain.
—Steve Peterson from Oregon

Brian Haughey responds:
Steve, I’m not at all reluctant about recommending dividend-paying stocks. However, not all investors are comfortable with a significant equity exposure, and many choose to have a proportion—perhaps the majority—of their portfolio in bonds.

Comments on “Low Interest Rates Are Impacting Individual Investors’ Portfolio Allocations,” by Charles Rotblut, CFA, in the November 2019 AAII Journal:

If the fixed-income portion of your overall allocation is intended for the safe ballast, reaching for yield—due to current low prevailing returns in fixed income—seems risky. Although I understand the strategy especially for retirees on fixed income who are hoping to continue to use a 4% withdrawal, I believe the risk is too high. It was reassuring to recently read from AAII that typically during long periods when fixed-income rates are low, the equity returns tend to be larger, thus leveling the overall return of a 50/50 portfolio for example. Although history may not repeat itself, this finding would suggest no need to alter an allocation plan while the prevailing fixed-income returns are low.
—Doug Propp from Illinois

Giving to Heirs Now

Comments on “Seniors—For Whom Are You Investing?” by Jonathan Pond in the November 2019 AAII Journal:

My wife and I will not spend our savings in our lifetimes and have decided to do just as the article suggests. At this point we are 50/50 allocated. At the next down market, I will increase my equity allocation to 100% minus five years of RMDs used to build a five-year bond ladder. Based on Level3 Investing, the five years should be a fairly conservative way to “insure” not having to sell depreciated assets.
—Peter from Michigan

I remember how much we struggled as middle-aged parents, so we have decided to help our children when they need it. We pay college tuition for grandkids and for a wonderful week together at the beach, and we get to see how happy these gifts make our children and grandchildren.
—Harrison from Virginia

We plan to pass on what is left of our estate to not-for-profit organizations that we support. Something I’ve learned from AAII articles is that we may be living more conservatively than we need to be, so we are changing our ways, enjoying some things more than we may have in the past when we were worried about accumulating.
—Richard from Pennsylvania

Benchmarking Options

Comments on “Benchmarking: The Art of the Science” by Craig L. Israelsen, Ph.D., in the November 2019 AAII Journal:

The author is essentially arguing to change the markings on a ruler, depending on what you are measuring. Rather, I use two benchmarks—the S&P 500 index and a money market fund, which can be approximated by either the fed funds rate or a three-month Treasury bill. Compare various portfolio strategies by seeing how much they exceed the return of a money market fund and lag the S&P 500 return.
—Richard from California

I construct five different “benchmarks” and use them for slightly different purposes. I compare my actual performance to two benchmarks: One is a benchmark constructed using the returns of comparative indexes assigned to each investment in my quarterly report, weighted by the actual allocation; another is an index constructed using the Morningstar category return of each investment, weighted by the actual allocation. I use three other benchmarks to help guide allocation changes: the Schwab Moderate and Moderate Conservative Benchmarks and a traditional 50/50 benchmark of S&P 500 and the Bloomberg Barclays U.S. Aggregate Bond index.
—Joe from Texas