Portfolio balancing

Financial planners are taught that a portfolio balance of 60% stocks, 40% bonds has yielded the optimum return of growth and low volatility over the course of decades. Similar to the 30,000-foot perspective of saying that the stock market returns an average of 10% per year, this recommended balance ignores shorter-term swings and all kinds of macroeconomic effects from the business cycle to the campaigns of the Federal Reserve to mitigate crises and tamp down inflation.

Anyone with a time frame of less than 40 years to liquidate assets better beware of broad-brush statistics.

Every household has its own needs for growth, stability and availability of cash flow for routine life and unexpected emergencies. Cash flow is king. Failing to maintain an adequate emergency fund could force the sale of assets when their values are temporarily depressed. Reaching for growth usually means reaching for risk – which means loss during the inevitable macroeconomic cycles.

The Fed and Congress flooded the economy with unprecedented monetary and fiscal stimulus in 2020 and 2021. Unsurprisingly (especially including Covid-related supply-chain restrictions) this caused inflation.

Monetary stimulus caused “everything bubbles” in stocks, bonds, real estate, crypto currency and other bizarre investments (like SPACs) which are symptomatic of a “high fever” in speculation. I recognized the classic bubble since it resembled the 2000 dot-com bubble and many other historic bubbles. I sold almost all my stock holdings, especially S&P 500 funds which had a concentration of overvalued tech stocks.

Every METAR knows that the Fed’s program of raising the fed funds rate and QT in 2022 caused both the stock and bond markets to tank at the same time. But are the bubbles completely deflated at this time?

Stocks Haven’t Looked This Unattractive Since 2007

The allure of shares dimmed when bond yields surged and the corporate-earnings picture continued to darken

By Eric Wallerstein, The Wall Street Journal, April 6, 2023

The reward for owning stocks over bonds hasn’t been this slim since before the 2008 financial crisis.

The equity risk premium — the gap between the S&P 500’s earnings yield and that of 10-year Treasurys — sits around 1.59 percentage points, a low not seen since October 2007.

That is well below the average gap of around 3.5 points since 2008. The reduction is a challenge for stocks going forward. Equities need to promise a higher reward than bonds over the long term. Otherwise, the safety of Treasurys would outweigh the risks of stocks losing some, if not all, of investors’ money…

The Federal Reserve now faces the dual challenge of raising interest rates to cool inflation while reaching into its toolbox to prevent a full-blown banking crisis from erupting — both of which cloud the outlook for stocks…

Value stocks are “dirt cheap” relative to growth, now more discounted than they have been four-fifths of the time in U.S. stock-market history…When inflation has run between 4% to 8% a year, value stocks have outperformed their growth peers by 6 to 8 percentage points annually… [end quote]

Both the bond and stock markets are behaving as if happy days are here again.

The stock market has plenty of animal spirits. Even the slightest hint that the Fed will pause raising the fed funds rate causes a pop. The stock market has been in a channel with minor noise for months. (Up about 6% in 2023 but no sign of a true bull market.) Traders are shrugging off the possibility of recession which would depress earnings. The CAPE has dropped a little from its bubble high but stocks are still overvalued.

Meanwhile, the bond market is convinced that the Fed will conquer inflation decisively. The 5 and 10 year breakeven inflation rate is 2.25%. The Treasury yield curve has dropped since the banking crisis as the Fed added to its assets, largely reversing QT. The inverted yield curve shows that the bond market has been expecting a recession for many months now.

If inflation stays in the range of 4% to 8% for an extended period of time, the bond market will be surprised in a bad way. Real (inflation-adjusted) yields are still negative and would become even more negative. The Federal Reserve would be forced to raise the fed funds rate even in the teeth of a recession. They would figure out programs to protect banks with large Treasury holding, but many smaller banks don’t have Treasuries but do have C & I portfolios (commercial and industrial loans) that would be vulnerable to defaults in a recession.

I have CDs maturing in 2023. Where to re-invest? I’d like to buy stocks but I still think they are overpriced. I think the stock and bond markets are both overly optimistic.

Bond yields, including TIPS yields, have been falling. I don’t see anything I really want to buy.

I’m not sure what to do.



Value might be under-priced. VTV is slightly negative right now, actually, VYM slightly more negative (I hold VYM). Both could be coiled springs if the Fed keeps raising rates. But the markets are not expecting that, which likely explains why QQQ is nearly three-times the performer that VOO is right now.

I’d say value and dividend if rates keep going up. Tech if rates start to drop. I can’t decide which will happen still.


Have you looked into whether any of your brokers offer brokered CDs? If so, check to see how liquid they are. I keep thinking about that, as one broker I use does offer that option. Thing is, CD interest is taxed much more highly than stock dividends, which offsets some of the higher rate of return.



Inflation is moving much closer to 4% than 8% over recent months, a quick look at the data will show that.

You say this over and over again over the last several months: that real rates are negative. Can you show specifics, such as term, nominal yield, and expected inflation over that term?

Specifically, which rate that consumers and businesses actually borrow at currently, with a realistic forward inflation rate, results in a negative real rate?

I don’t think using the Fed funds rate is appropriate, consumers and businesses don’t borrow at that rate.

I don’t think using trailing 12 month inflation is appropriate, that measures past inflation, not future inflation over the term of a hypothetical loan…

One phenomenon I bet we can agree on is that there is a lot of wealth in the world. This is wealth that doesn’t need to be used on consumption because the owners couldn’t realistically spend it all other than maybe print it and set it on fire and even that might be difficult. This wealth looks for a home in assets, which drives up asset prices: bonds, real estate, stocks, etc. I don’t see this phenomenon ending, so I see an excess of capital resulting in lower inflation, lower bond yields, and higher stock valuations (lower earnings yields).

Actually, your post is a perfect micro example illustrating the macro point, you are literally asking “I have more money than I need to spend, where can I put it, I’m struggling to find a place for it because yields are so low?”


I spent the last half of 2021 selling bonds/ bond funds resulting in a roughly 2/3 stock 1/3 cash port at the end of 2021. My stock port fell to roughly 60 percent of total last year mostly because my stock prices fell. I am now averaging some of my cash back into equities because it is easy to get out of an expensive market, impossible to time the re-entry.


Here’s the situation. Safe, investment-grade or Treasury yields are the highest they’ve been since late 2007 - 15+ years. Money markets, for short term needs, are at 4+ %. Reasonably safe dividend yields of 7, 8, (9)% are available right now. When the Fed stops hosing down the economy and drops rates (6 months? a year?), those investments will go up. If they get forced to resume QE, the stock market will go back to solidly bullish.

Stocks are “overvalued” by CAPE, historical comparisons, value metrics, yes - but, there’s a “so what” as they have been overvalued for years. And we can’t market time by overvaluation measures.

The new short and mid term Treasury ETFs XBIL, OBIL and a couple of others offer extremely low-fee, managed “on the run” access to Treasuries. So we don’t even have to go to Treasury Direct or pay higher fee ETFs or mutual fund to own Treasuries of various durations.

It seems…prudent? feasible? to do a 40-60 or 50-50 now. The equity side could be split equally between US large-mid cap ETFs (or “Dividend Champion/Contender” stocks) with some “growth” portion, and foreign developed (EAFE) ETFs. The fixed income portion could involve PGX (assuming interest rates have mostly topped), the new Treasury ETFs mentioned above, non-commercial real estate preferreds or non-commercial REITs) and money markets.

I’m only a couple of years out from (early) retirement - assuming my bridge job comes through in a little while, and The Markets / Fed don’t smote our ruin. So this is absolutely influenced by my personal situation and therefore useless to anyone. Just my .04.



Hi FlyingCircus,

Thanks for that. Could you expand a bit on the reasonably safe 7-8% dividend payers…And how do you screen for such stocks…

Thank you,

If the FED stopped here I doubt rates would go down. If the FED goes high enough then afterwards rates will come down…but not much.

This is not the 1950s model of high taxes on corporations and the wealthy and low interest rates. The FED and federal government are approaching a middle ground of higher rates and modest tax rates shared by most people. This is to head off inflationary pressures.

We are reindustrializing. Meaning creating a deflationary force in goods going forward. A few years from now if there was a recession the FED would be in a position to ease rates to encourage a further build out but that is not now.

Inflation from a year ago is at the 6% rate. Most of that happened before mid-year. If you look at the eight months from July 2022 to Feb 2023, the annualized inflation rate is about 3%. So in the next four months you can expect the 12 month total to gradually drop from 6% to 3%.



As posted in earlier threads here, I’ve been laddering CDs and spreading my cash-like assets around. CDs are paying some great rates right now, some 5+% and are FDIC insured.

I don’t need a lot of risk in my portfolio going forward and I sleep well at night knowing that the bottom will not be pulled out from under my savings.



@38Packard I check the Fidelity bond lists practically every day. I’m seeking CDs that are at least 3 - 5 years because the Fed may drop interest rates and the banks will follow, which has happened before.

The yield curve is inverted. All the 5+% rates are short-term. All the brokered CDs with high rates are callable. I’m screening for non-callable CDs and bonds. They are all under 5%. If you have found a 5 year non-callable CD over 5%, please let me know where you have found it.


Hi @Wendy -

All of the CDs that I am purchasing through Fidelity are shorter term, FDIC insured and are call protected.

045491MX2 ASSOCIATED BK GB WIS SR MTN BE CD 4.95000% 06/22/2023
02081QCD0 ALPINE BKS COLO GLENWOOD CD 5.15000% 12/28/2023
02081QCE8 ALPINE BKS COLO GLENWOOD CD 5.25000% 03/28/2024
564759RH3 MANUFACTURERS &TRADERS TR CO CD 4.85000% 06/07/2024

666613LF9 NORTHPOINTE BK GRAND RAPIDS MI CD 5.05000% 06/21/2023
316777YJ4 FIFTH THIRD BK CINCINNATI STN CD 5.10000% 09/21/2023
062683HE0 BANK HOPE LOS ANGELES CA CD 5.25000% 12/26/2023
02081QCE8 ALPINE BKS COLO GLENWOOD CD 5.25000% 03/28/2024

These are the first rungs of the ladders. I plan to reinvest the CDs as they mature into 1 year CDs if rates stay the same as they are now. The longer term CDs (as you said) were NOT call protected nor were the rates as good as the shorter term (1 year or less).



@38Packard the reason the longer terms are lower is that the bond market is convinced that rates will drop significantly in the next year or two. Then you would be forced to reinvest the maturing CDs at the lower rates. BTDT.

The question is whether the sacrifice of 0.4% in the CD’s yield for 5 years is worth the cost of insurance against falling rates.


What is the yield you are looking for? You can get bonds, preferred’s for 8%~6% and there are securities that offer that kind of dividend, for ex: VZ. So you can do a simple covered call (with a little bit of downside protection), you can get easily mid single digit annualized return.

The regional banks have lost anywhere between 50% to 80% and their bonds, preferred’s all offering great yield, some bonds yield to maturity are closer to 10%, Of course you need to find the ones that can survive. There are lots of opportunities. The question is are we looking at the right place?



No guarantee but I think the buyers in this market are being foolish because corporate profits are eroding.

This chart can go either way but in all likelihood the two more recent peaks are not taken out.

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Sure, a couple of ways.
#1 A guy named Jim Garrett has maintained a Google Sheet for some time focused on Preferred stocks and other ETD types. It includes risk ratings if either the issue or the parent has been rated by Moodys or S&P. Reits and Preferred Stocks - Google Sheets

2 Fidelity has a decent preferred and general stock screener in the website if you have an account with them. Fidelity’s includes stats like # of years of dividend growth I believe.

3 Any brokerage website has decent screeners (as does Zacks & others) where you can filter on high yield and add crap filters for microcap / low priced stock and profitability, ROE, etc.

4 Justin Law’s service on Seeking Alpha is one of many following the Dividend Champion, Contender and Challenger approach. He publishes weekly lists of companies about to go ex-dividend, for those interested in “dividend surfing” with a portion of their ports, but more valuable than that it shows their yield and # of years in the weekly newsletters. And of course he and others run paid services. Dividend Champion, Contender, And Challenger Highlights: Week Of April 9 | Seeking Alpha



Thanks a lot Flying Circus! Very helpful indeed. I am looking into these and trying to learn about the preferred stocks…

Thanks again!

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I used to own JPS, I closed it around 2018 and bought back at 2020 decline and closed it again. I am looking into it now. It has $1.5 B market cap and manages much higher assets (due to leverage) and trades at good volume.

Trying to pick individual preferred’s are fraught with risks, you need to understand the issuer, issue related nuances and if the issuers merges or bought over, these issues could get stranded, etc. Also, individual issues don’t have much volume.

For those interested in doing individual fund research https://www.cefconnect.com/ is a good resource.


Over the years I have found this free newsletter to be useful.