Talking heads on Bloomberg’s Wall Street Week say diversified portfolio is best and hang on for better times as the best solution to rising interest rates.
Is an S&P 500 Index fund diversified? Some say its heavy in tech stocks. Total market fund/etf?
Cash is safest, but interest rate earned will likely be less than inflation (especially after taxes). So net loss in buying power.
60/40 portfolio (60% equities/40% bonds) said to be the standard portfolio on CNBC. Anybody actually do that?
“Is an S&P 500 Index fund diversified?”
Paul,
A cap-weighted, SP500 index fund cannot be considered “diversified”, because just 8 names --chiefly, the FAANGs-- are responsible for 25% of the gains (or losses). Instead, it’s just a very focused bet on US large caps. But an equal-weight SP500 fund has a very high correlation to the cap-weighted one. So that’s no place to find “diversification”, either.
In the old days, holding internationals did offer some genuine diversification. But in these days of increasing globalization, that edge has all but disappeared. If an offset to rising interest-rates is wanted, commodities is still the best bet. But these days, even those markets are being manipulated.
Arindam
“60/40 portfolio (60% equities/40% bonds) said to be the standard portfolio on CNBC. Anybody actually do that?”
I was roughly 2/3 equities, 1/3 bonds in my investment accounts until somebody - probably mungofitch - convinced me that bonds were even more overvalued than stocks - consequently, I was roughly 2/3 stocks, 1/3 cash by the end of last year. So far so good. My cash has lost only to inflation this year while my bond funds would be in free fall with no end in sight.
My cash position has risen relative to my equities solely because my stocks are down and my cash is holding firm - if you don’t count inflation.
Not sure when I will start averaging some of that cash back into stocks, bonds or whatever.
I’m very conservative and my main objective is asset preservation. Many METARs think I’m somewhat nuts for deliberately bypassing get-rich-quick stocks in favor of stodgy investments.
I avoided the usual S&P 500 funds because they are overweight in tech which is fast to go up but also overvalued so likely to be hit hard in a downturn. Instead, I put some money into funds which contain dividend-yielding stocks, including consumer staples and commodity producers.
Total market funds will be hit like the SPX if not worse when the Fed raises rates because smaller companies are more vulnerable to rising interest rates.
Cash is safest, especially when the Fed is raising interest rates and bonds are bound to fall as a result. I buy short-term, high-rated corporate bonds which I hold to maturity – until this Fed cycle is complete.
Don’t forget I-bonds. Although TIPS are not as safe as I-Bonds (since return of principal isn’t guaranteed if sold before maturity), they are finally yielding the inflation rate. I would wait on these until their rate rises to 1% plus inflation or better.
https://fred.stlouisfed.org/series/DFII10
Cash can be held in 3 or 6 month Treasuries which are finally yielding something. TreasuryDirect.gov
linked to your checking or savings account.
I’m keeping powder dry. The Fed will raise the fed funds rate at least twice more this year and probably more. The futures are saying 3.5% by 2023. If this happpens, the stock and bond markets will fall together. I’m following the “mungofitch 99 day rule” and staying clear of the stock market until it starts making new highs again. Which I think will be at least 6 months from now, if not more.
Wendy
Paul, I forgot to mention…“Talking heads on Bloomberg’s Wall Street Week” won’t be employed for long if they say “Don’t fight the Fed – charts are dropping like stones – get into cash and stay in cash until the storm is over” and repeat monotonously for the next 6 months.
When there’s blood in the streets and they DO say that, it will be time to get back into the market.
Wendy
Is an S&P 500 Index fund diversified?
Too much so!
60/40 portfolio (60% equities/40% bonds) said to be the standard portfolio on CNBC. Anybody actually do that?
I used to until I learned better – now no bonds – stocks, option, & cash.
The Captain
A cap-weighted, SP500 index fund cannot be considered “diversified”, because just 8 names --chiefly, the FAANGs-- are responsible for 25% of the gains (or losses).
A more diversified ETF for large caps would be one that equal-weighted (each stock is 1/500 of the portfolio). For example, check out RSP.
DB2
The only bonds we hold are Ibonds. Kind of a family tradition to avoid bonds, and the correlation between stocks and bonds is rarely inverse these days.
IP
When Tesla share price falls we are not surprised to learn that Musk is selling big to fund his purchase of Twitter.
When bond prices fall (pushing up interest rates) will we be surprised to learn the Fed is selling their QE bonds?
"Is an S&P 500 Index fund diversified? Some say its heavy in tech stocks. Total market fund/etf?
Cash is safest, but interest rate earned will likely be less than inflation (especially after taxes). So net loss in buying power.
60/40 portfolio (60% equities/40% bonds) said to be the standard portfolio on CNBC. Anybody actually do that? "
Should individual investors do what the “talking heads” say? Are the goals of individual
investors universally reflected by Index Funds? Why would anyone think that there is only one
investment method that would work for all investors all the time?
Howie52
We are invested mainly in dividend payers as we are retired and look for income. Our cash
position is lower than it has been in years - as we are using the cash position to pay for home
renovations and repairs needed to stay in the home comfortably. Bonds are a minor portion of
our investments since interest rates have been low - we have used short-term bond funds - more to
have some bond investments beyond savings bonds as we went into retired life.
We will be considering what we need to do about rebuilding the cash position in the next few
years - until the RMD years start up a couple years down the road. We have to consider what
method to use - as well as whether we need the cash position we had before the renovations.
As interest rates rise, buying individual bonds become moroe reasonable for our circumstances.
current environment is difficult.
Fed raising rate is a given so market is not guessing at this time and it’s somewhat surprising the crash is tempered and not pricing in disaster. Jamie Dimon has been helpfully spreading panic telling us it’s a hurricane coming and batten down the hatches. He has no helpful hints to offer–just spreading storm warnings. He’s annoying.
What do you do? Most of my holdings are sitting on substantial cap gains–sold off the losers to offset selling winners over the past year so not much offset left.
With no apparent big bubbles forming like 2008, should we still sell off to raise cash and end up paying 30% for cap gains? Qualified dividends are taxed at lower rates than cap gains so holding these through the correction doesn’t seem like an entirely bad idea.
Any thoughts?