Monday, November 23, 2009

They Said It

From this week's Barrons, courtesy of my friend, Ted:

"On the equity/fixed-income side, the traditional rule of thumb has been for retirement portfolios to have a 60/40 split between stocks and bonds. But until the Fed starts raising interest rates, retirees should consider curbing the fixed-income portion of their portfolios. Because bond prices fall as rates climb, cheaper fixed-income investments will be available down the road. A 65/35 or even 70/30 tilt might be best now. Warns Jim Marlowe, a 61-year-old retired broker supervisor at Merrill Lynch: "Bond funds are where all the money is going right now, so when the market gets a whiff of higher rates, it'll be 'Katie, bar the door.' "

Ummm... stock prices might fall also when interest rates are raised!   This points out a conundrum faced by retirees right now:  do you keep your money safe, in short term treasuries (let's just ASSUME that short term treasuries are indeed safe -that's a debate for another day) - earning less than 1%, providing almost no income?  Or do you invest your money into another asset class where the prospects for price declines are signficant at the least?

It's return-free-risk all over again.



Anonymous said...

If you would've gone 60/40 in October, 2007, when the equity market was peaking at an all time high, you'd be down 6% right now, assuming you rebalanced annually.

Do you think we'll have an equity selloff like we had in 2008/2009? Charlie Munger said what we saw was a rare event... 2 or 3 times a century.

DaveinHackensack said...

As I noted on my blog a couple of days ago, The FT's Richard Bernstein made a good point about the recent negative correlation between Treasuries and stocks (and pretty much every other asset class). So if an institutional investor thinks stocks are overvalued, it makes sense to hold some Treasuries now, which will likely rally when the stock market corrects again. At that point, he might consider diversifying out of Treasuries.

Another option would be to start unloading Treasuries now and use other means to moderate the risks of the next market correction, i.e., by selectively shorting stocks or buying puts on them as part of your overall portfolio strategy.

Anonymous said...

If the wish is to store ones accumulated wealth then why play in the rigged casino that is the US financial markets today.

Gold and Silver seem to be the way to go. Heck, they're even appreciating.

JJ said...

One thing financial experts need to realize is that pension funds are by definition short fixed income as their liability profile is a series of somewhat fixed cash flows (aside from mortality / longevity risk). By being in a 60/40 portfolio these funds got crushed in '08 since they were basically 60% long equities and 60% short FI