Stocks, bonds...and risk

Investment Analysis Clubs Macro Economic Trends and Risks
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https://www.wsj.com/finance/bond-yields-rising-charts-367dba8a?mod=hp_lead_pos3

Why Bond Yields Are Surging Around the World

Selloff in government debt is making it costlier to borrow

By Sam Goldfarb, The Wall Street Journal, Jan. 13, 2025

Government-bond yields have surged across the developed world in recent weeks, jarring stocks and pressuring indebted countries.

The worldwide bond rout threatens to complicate the efforts of central banks that have been cutting short-term interest rates. Rate cuts aim to lower borrowing costs for consumers and businesses. But the rise in yields is instead making it costlier to borrow, “tightening financial conditions” in Wall Street parlance. …

[snip many reasons why Treasury prices are falling. Doesn’t mention the > $1 Trillion that investors have poured into the stock market in the past 6 months, reducing the demand for bonds.]

Rising yields can pressure stocks by lifting borrowing costs across the economy and increasing the risk-free return that investors can get by holding Treasurys to maturity. As that safe return rises, riskier assets like stocks can appear more expensive…

Stocks could be especially vulnerable to rising yields now because they were already looking expensive by historical standards.

One measure of stock valuations is the “excess CAPE yield” developed by economist Robert Shiller. This shows the S&P 500’s inflation-adjusted earnings-to-price ratio minus inflation-adjusted bond yields. At the end of December, that excess yield was just 1.24%—a level that has historically translated to poor returns for stocks over the next 10 years.

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Is it worth the risk of holding richly-valued stocks in a bubble when the risk-free return of Treasuries is almost the same? Many analysts are predicting that the SPX will rise in 2025 as it did in 2023 and 2024…but that’s just a spin of the roulette wheel.

Wendy

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That’s a good question. I used to be very heavy in QQQ but those days are behind me. I’m now 10% bonds, half that in 6-month Treasuries. I’m considering buying more short-term Treasuries.

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Austerity Liz Truss.

Better your money than mine my friend.

You will say “maturity”. Which works. But it is a nonsense game where we all won’t win till we buy equities at discounted rates to the long term trend line.

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I’m a big believer in “Stocks for the Long Run” with 10 years’ worth of living expenses in cash and short-term bonds. With time and growth, that “10 years’ worth of living expenses” becomes a smaller and smaller portion of the portfolio.

I started out in 1994 with a 4.0% withdrawal from a 70% stock, 30% fixed income allocation. Today after 30 years, I’m down to a 0.30% withdrawal and a 97% stock, 3% cash and fixed income allocation – and I’m still waiting another year to start Social Security at age 70. It’s hard to imagine how much poorer I’d be today if was selling and buying stocks in response to the “risks” of interest rates or “uncertainly” while incurring all kinds of taxes and trading costs with the “churn”.

Also interesting, that Morningstar released it’s annual “State of Retirement Income” Report and advised that the safe withdrawal rate is now 3.7% for a 30-year pay out period.

https://www.fa-mag.com/news/morningstar-safe-withdrawal-rate-for-2025-dips-to-3-7-80946.html?section=43&utm_source=FA+Magazine&utm_campaign=d17ce186da-FAN_AM_Ari+Galper+2%2F11+Webcast_011325&utm_medium=email&utm_term=0_-02ce404ce3-244569363

Meanwhile, the creator of the 4% rule, MIT-trained aerospace engineer William P. Bengen, recently said that 4.2% is safe for a 60-year pay out period. (Though Bengen himself got spooked after the 2008 market crash and begin a market timing regime that’s left him in fixed income ever since) He admits his investment returns suffered.

Who to believe? Personally, I don’t think you can predict the future with more than one significant digit of accuracy – so it’s 4%, and has been for quite a while.

Also kudos to Morningstar for explaining that waiting until age 70 to collect Social Security actually increases the income available for withdrawal at age 62 (because with a larger SS check, you’ll need to draw less from your portfolio in the future). This is a piece of arithmetic that many retirees just don’t get.

Of course, the nonsense about “a holistic retirement income plan that includes Social Security and possibly annuities”, is just that. {{ LOL }}

intercst

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How close are you to retirement? If it’s less than 10 years, I’d start building the “10 years of living expenses in fixed income” by moving 4% per year to the fixed income account. The historical max safe withdrawal allocation is a 4% withdrawal from 60% stock, 40% fixed income portfolio.

intercst

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Well, I’m 58, with a decent shot of retiring at 59 or 60. I would not draw down the IRA until I was 65, so I just calculated that when I take into account taxable cash my overall bond exposure is actually much higher than I thought. Which makes me feel better. Thanks for the nudge.

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I have not asked my business partner what he gets in retirement from Aetna after being an executive. I doubt the above matters one hoot to him.

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Yes. The whole 4% withdrawal thing is pertinent to those in the middle. Those with high net worth will easily outlive their money, and people at/near/below the poverty level aren’t going to have enough whatever they do (assuming they do have savings).

DB2

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My being an artist into econ with an auditory problem has put me in a strange situation. I have assets, but even with a good job position I do not assume a huge retirement.

That said the game development is after ten years of digital artwork. It might put me into a very different wealth category. There is a second game design concept as well. And another business concept.

I have a lot of time at age 61 because energy wise I am doing extremely well.

I was shocked by who had retired or was retiring at my reunion last year. We skipped the reunion in 2021 because of Covid. People seemed so old. A few were full of energy like I am. Too many were drinking into the abys.

Net worth things can radically change soon. The game will be out in March.

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Personally, I have a bond ladder that is just over 7 years long at this point. That is a bit longer than my range (5 years target, with +/- 2 years of flex based on remainder of investment performance).

There are a few reasons why I don’t really want my bond ladder to stretch much beyond 7 years at this point. Chief among them is interest rates. Last time I extended my bond ladder, I got a yield to worst of around 5.5% on an investment grade corporate bond. After taxes, that kind of has a fighting chance to maybe keep up with inflation, but it doesn’t really look like a wealth building opportunity.

For my longer term money, I like to look for investments that have the potential to beat inflation, not just keep up with it. If rates spike such that investment grade bonds look compelling from a total potential return perspective, that could entice me to extend the bond ladder a bit longer.

That said, I am still well below a typical retirement age. My bond ladder started out as a “college savings supplement” for my kids’ educations. As retirement gets closer, I may change my mind in terms of how long I would want a bond ladder to be.

If inflation stays under control and if my stock and options investments perform well, it gets more straightforward to lengthen the bond ladder.

If inflation gets too far ahead of the projection I embed in the bond ladder, my priority would be to increase the size of each rung to compensate rather than add more rungs.

If my stock and options investments perform poorly, well, that’s why the bond ladder has a range in terms of target length. If the target range is 5 +/- 2 years, and I’m sitting at 7, then there’s 4 years’ of patience before it shrinks below the range. And even if that time is insufficient, there’s still an additional 3 years to “find flexibility” before absolutely needing to tap stocks.

And even that view may be somewhat conservative. After all, most bonds generate interest, and many stocks pay dividends. If all I’m counting on for spending cash is the maturing bonds in the bond ladder, those dividends and interest payments are cash money that could be reinvested to try to buy more time…

Regards,
-Chuck

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