I picked this and one other group to ask this question, because the people here are smart and I feel comfortable here.
I get a few newsletters. One has me invest in close end bond funds, which are great, except in this environment. With the leverage and interest rates going up, the funds could get a margin call, and be forced to sell the bonds at fire sale prices. The newsletter is having me sell some of the close end funds.
The other newsletter invests, in traditional bond funds. 20%, multi asset class, 20% short term investment grade, 20% intermediate investment grade, 20% high yield, and 20% balanced funds.
My question is it better to invest in these or keep the money in cash?
Read the Berkshire Hathaway chairmanâs letter from 2011, pages 17-19, where it talks about the three major types of assets one can own.
The heading is âThe Basic Choices for Investors and the One We Strongly Preferâ https://www.berkshirehathaway.com/2011ar/2011ar.pdf
My own conclusion along the same lines:
Donât own any bonds. Almost all of them have a negative expected real return these days.
If youâre going to lose money, there are lots more fun ways to do it.
And the only thing worse than owning bonds is owning a bond fund, which shaves those last few basis points off and gives them to the manager.
Given current prices, my own conclusions are:
There is no case to be made for buying or holding bonds. The financial equivalent of a âkick meâ sign on your back.
There is a case to be made for a cash allocation. Depending on who you ask, it might be very small or very large.
There isnât a strong case for broad US equities at current valuation levels.
A possible exception: the Nasdaq 100 equal weight (QQQE) isnât too badly valued, IMO. Only a whisker more expensive than usual, by my estimation.
There is an excellent case for judiciously selected equitiesâstrong ones at fair-to-good prices.
There are probably some excellent picks among non-US equities and smallish private companies. More work and research, of course.
There will be exceptions to all of these, but those are the broad strokes that make sense.
Exceptions are exceptional.
Last thought, for fancier approaches: consider asymmetrical investments.
If you win you win big, if you lose you lose only a little.
This might mean using option contracts, but there are lots of other ways.
âThe Dhandho Investorâ is an interesting book.
It points out that the very highest returns tend to be among those potential investments with the LEAST predictable outcomesâŚ
but investing in them in ways that you have an extremely small downside.
Donât invest in any bond funds at this time. When interest rates are rising, all bond funds will lose Net Asset Value (NAV).
When interest rates are rising, if you buy individual bonds, keep duration short. (cf. âThe Strategic Bond Investor.â) Interest rates are rising now and they will continue to rise at least until the 3rd quarter, probably longer. https://stockcharts.com/freecharts/candleglance.html?$IRX,$UâŚ
If you have cash, buy 3 month or 6 month Treasuries at www.TreasuryDirect.gov. Link your savings (checking, etc.) account to your new Treasury Direct account. Transfer the money and put in orders for upcoming auctions. Choose whether you want to continuously roll over the T-bills as they mature or send them back to your original account. This will get you more interest than a savings account (>1%).
If you have cash, buy 3 month or 6 month Treasuries at www.TreasuryDirect.gov. ⌠This will get you more interest than a savings account (>1%).
Interesting. My online savings accounts have been bumping up their rates, now Ally & Alliant are paying 0.75%. DCU is paying 6% for up to $1000. Peanuts over $1000. Another CU is paying 1.5% on their âsuper saverâ account, but you can only add $1000 each month. We each have an account at these, so $2K at 6% and adding $2K/mo to the 1.5% accounts.
Individual preferred issues that are roughly IG currently yield 5.5% and some are tax advantaged. Money market seems dumb given this and the move weâve seen. Also, ârates are risingâ is a comment that assumes trillions in capital moving through the bond market are too stupid to realize this. Rates are where the market expects them to be.
There is literally no limit to the amount of T-bills you can buy. Ask China.
The interest rate is low but the interest isnât negligible, depending on how much you are investing.
<What to do, what to do. >
Itâs too early to go out further than a few months. Wait until 4Q22 at the earliest.
Wendy
When interest rates are rising, if you buy individual bonds, keep duration short. (cf. "The Strategic Bond Investor.") Interest rates are rising now and they will continue to rise at least until the 3rd quarter, probably longer. https://stockcharts.com/freecharts/candleglance.html?$IRX,$UâŚâŚ If you have cash, buy 3 month or 6 month Treasuries at www.TreasuryDirect.gov. Link your savings (checking, etc.) account to your new Treasury Direct account. Transfer the money and put in orders for upcoming auctions. Choose whether you want to continuously roll over the T-bills as they mature or send them back to your original account. This will get you more interest than a savings account (>1%).
This seems like good solid intelligent advice on how to invest in fixed income.
But I am reminded strongly of the saying: if something is not worth doing, it is not worth doing well : )
Fixed income investing is not worth doing. Not at current yields, not at anything close to current yields.
I can think of only two kinds of things I am putting my investment capital into:
(1) Things with a decent positive expected return in terms of real purchasing power.
Basically there are no fixed income choices.
(2) Cash, losing value very slowly, while waiting for an even better opportunity in category 1
As it happens my cash pile apparently hasnât lost me anything since the start of last year. (so far)
US inflation has so far showed up strongly backwards in the US dollarâs value, so my USD cash has more purchasing power here in Europe than it did before.
Also, ârates are risingâ is a comment that assumes trillions in capital moving through the bond market are too stupid to realize thisâŚ
Trillions of dollars in the bond market were invested in things with negative nominal yields until recently.
The yields were wildly negative in real terms.
They have taken a bath on that, unsurprisingly.
So I would not argue anything at all starting from the notion that anyone in the bond market, even (especially) the âbig moneyâ, has enough IQ points to rub together.
Well, thatâs not entirely fair.
The great majority of big institutional bond buyers know full well that they are a losing proposition at negative real yields and donât want to buy them, but they are forced to.
Either a constrained fund mandate, a regulatory requirement, or as implementation of a government policy which is not return seeking.
There is no reason to follow their idiocy if you are NOT forced to do so.
Market prices are set by traders. We naturally expect professional traders to know what they are doing.
A few years ago, at a family reunion, I met a young (late 20âs) professional bond trader and his lady friend from the same bond desk at a large investment bank. (Both tall, very good-looking and dressed beautifully. Very self-confident.) Neither of them had been alive in the 1970s and neither of them had even heard of the inflation in the late 1970s or Paul Volcker. I would have thought that they would have studied the history of bonds, butâŚnope.
The current rates and expectations in the bond market are almost identical to the recent past. I disagree. I think that the Macroeconomic situation has a high risk of returning to stagflation that the U.S. hasnât seen since the 1970s.
I think many of the bond traders are projecting the recent past into the future (which is natural if you donât know anything about the more distant past). They will be shocked if the Fed frees the bond market (which hasnât happened since 2000) and the 10-year Treasury returns to its historic real yield of inflation + 2.5%. Trillions of dollars of bond value would evaporate. Some of the traders were in elementary school in 2000. They wonât know what hit them.
I agree with mungofitch that it doesnât make sense to hold bonds at this time, especially not in a closed-end fund with a management fee. The real yields are negative. But bond traders (âthe marketâ) are individuals and arenât omniscient. They donât necessarily understand what will happen to the value of their bonds if the Federal Reserve actually does what they say they will do â return the Fed funds rate to neutral and shed a large part of their long-term book of Treasury and mortgage bonds.
I recommended very short-term T-bills as a way to get a little extra interest from cash. Short-term T-bills are really just a cash alternative â they shouldnât be counted as bonds.
"I had a fair amount of my âfixed-incomeâ money - essentially, living expenses to tide over when the market crunched for 6,8,10 years - in a couple of no-load, very low-fee âshort-term investment-gradeâ funds offered by a very large US brokerage house.
One cold dark mid-February weekend I did a deep dive into what the largest of these funds â marketed as about 24% of a mixture of US govt obligations, and the rest investment-grade corporate bonds - actually owned. What maturities? Who were the guarantors?"
and
"when you dive down, a full 49%** of all of the money this fund has in these âhigh-grade corporate bondsâ are in the âotherâ wastebasket, composed entirely of instruments that are subject to the specific footnote that they are âexempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be sold in transactions exempt from registration, normally to qualified institutional buyersâ ⢠If this was 2008, I would be thinking: tranches of mortgage-backed securities, which after a highly-questionable risk rating have themselves been chopped up, redistributed, renamed and resold multiple times to the degree that no one knows who owns what, but are obviously safe because a) theyâre rated by (corrupt, Moodyâs/S&P) rating houses; b) insured by an (insolvent, AIG) insurer, and c) everyone else is doing it. ⢠Except this isnât 2008âŚso until shown otherwise, I need to regard them as corporate IOUs of undiscoverable provenance and dubious respectability, which have packaged into bundles, sold, renamed, divided, resold, repeat. And their defaults will have nowhere to go but up once the Fed changes interest rates. As Charlie Munger succinctly, memorably, appropriately put it a few years back in a very similar circumstance (his language, not mine): âIf you mix raisins with tvrds, theyâre still tvrdsâ
Some of the traders were in elementary school in 2000. They wonât know what hit them.
OMG, the hubris. So you think you know better than all the bond traders in the world?
Let me just call your attention to a small comment that Mungofitch made. From where he sits, in Europe, U.S. bond prices havenât dropped at all, because the dollarâs exchange rate has risen as much as the nominal price has dropped. Think about that for a few minutes. Unless youâre a real bond expert, there are more moving parts to the equation than you even imagine exist.
I just noticed the âclosed endâ part of this.
This is a terrible time to sell closed end funds; they are at the steepest discounts to nav in about 5 years (most of them anyway).
Leverage for these doesnât work at all like brokerage leverage. Most cefs issue preferred stocks to finance the positions which means theyâre virtually guaranteed to never get âa margin callâ. This leverage will erode nav at usually 1.3 or 1.4 to 1 in down markets (and increase it at this rate as bonds rally ⌠to a point given maturities and callable nature of the portfolio).
This seems like good solid intelligent advice on how to invest in fixed income. But I am reminded strongly of the saying: if something is not worth doing, it is not worth doing well : ) Fixed income investing is not worth doing. Not at current yields, not at anything close to current yields.
YAY!!!
That cements my thinking to not bother with short-ish term T-bills. They are only a few basis-points more than my banks & CU. Not worth messing with. The difference in dollars is less than the gas savings of skipping a drive into town (2 gallons at $5/gal).
Wendy: I recommended very short-term T-bills as a way to get a little extra interest from cash. Short-term T-bills are really just a cash alternative â they shouldnât be counted as bonds.
âŚ
Rayvt: That cements my thinking to not bother with short-ish term T-bills. They are only a few basis-points more than my banks & CU. Not worth messing with.
Actually I tend to agree with Wendy on that one.
They are a fine substitute for cash, and thatâs what most money managers mean when they say âcashâ.
They are pretty much infinitely liquid, and so short term that the price only varies by negligible amounts.
The US government almost never defaults on them.
The only other alternative (other than physical banknotes) is to hold cash on deposit with a bank or broker.
Even with government guarantees thatâs at least as risky.
When the institution holding a guaranteed account fails, you might well get made whole, but it can take a loooong time, segregated or not.
I heard it a little differently. A job not worth doing well is not worth doing at all.
Well, yes, thatâs closer to the original cliche version.
But the slightly inverted version I quoted, from Mr Munger, gives insight into a much subtler problem, which is why itâs amusing (to some of us).
If something is not worth doing at all, itâs not worth bothering to learn how to be good at it.
I am not going to spend time learning how to be the worldâs best dynamite fisherman or Tide Pod swallower.
Or bond buyer in this yield regime.
