We have two relatively small percentage of our total investments/savings/cds in two Roth IRAs. They were temporarily put into Roth CD's a couple years ago and are now due to expire. The best rate we found if kept in CD's is 2.05% for 7 years.
My husband likes "safe and easy", but it would be hard for me to go that route, if only on principle. I would like to offer him a MF alternative that is most likely to at least double that rate... but also with very little chance of losses during extended downturn periods - and the timing seems especially poor with election/current unsolved economic problems right around the corner. We have ample funds in current money market/cd's that we don't need any income from these Roth IRAs.
IF we have a recession, can you recommend a mutual fund that is most likely to GAIN 2% or more? In the 2008 crash, WEFIX gained 2.29% in 2008, and several intermediate and short-term bond funds/etf's gained 6%+ (BND, BIV, VFIIX, VUSTX, SHY, VBISX), and my IAU gained 5.11%, and all definitely beat 2% over 7 year period.
But this is not 2008, and aren't the economic problems likely to be different enough that what did well then will not do well during our next extended strong downturn. So many of the bond funds now have significant amounts invested in mortgage-backed securities, so I don't know how well they would hold up in a recession.
Cathy
Comments
To manage this risk, I am following my asset allocation with both my bond and my equity allocations moving towards their respective low range within my portfolio. For me, I will be at about 30% fixed, 40% equity and 30% cash. I feel if things get bad, it will probally be good to actually have more cash than one needs. In addition, I'd remain well diversified while favoring overweights to the traditional defensive stock sectors during this time period. No sence for me to be chasing the hot asset class ... just to see it go cold.
And, possibly with equities running ... I'll still be getting decent returns and when things move south ... Well, I am already there with my allocation ready with the defensive. And, I can then capitalize in buying stuff up during the pull back or market correction.
Now you know my plan; and, how I am governing in this current risk on environemnt.
Sure you want to have some equities from my perspective ... but, not too much of a good thing mind you. Nothing wrong in being conserative from my thinking ... and, for me it is better to error on the side of caution ranther than the side of risk as I will soon be sixty five.
Within fixed income, I am favoring short duration, hybrid and multi sector bond funds.
Have a great day ... and, "Good Investing."
Skeeter
One: you have governments that seem to be trying to attempt anything to stop the possibility of recession, which, while not pleasant, is part of the flow of the business cycle. You have a QE program that is open-ended, and could be expanded or altered as time goes on if it does not achieve the desired result. So you can have the possibility that financial assets continue to act one way while the fundamentals (Fedex warning for like, what, the second time this year?) act another. As for shorting, I think people could certainly have success in individual names, but big picture, I question substantially shorting into currency debasement - and that will likely lead to the kind of "one after another" short covering rallies that we've seen over the last couple of years.
There will be dips and down days, but when you have open-ended money printing (or, as I noted in another thread this morning, rather than QE Infinity, I've come up with iQE, which will likely have much more appeal), you want to continue to have exposure to real assets and strong businesses with at least a good portion of your portfolio.
It's difficult to recommend something that will do well in another recession, as it's difficult to get clarity on what may happen or how policy makers will intervene.
Forester Value (FVALX) is an example of a fund that has done a very good job with the difficult task of dialing risk up and down significantly. That is one of the few stock funds that didn't lose in 2008 (I think it was flat?)
Marketfield (MFLDX) is a highly flexible fund that I continue to like and recommend. That fund is global, multi-asset and also has done an excellent job dialing up and down risk, as well as being nimble. It has been bought and I believe it will change next month (?) - shareholders now will be grandfathered in at current terms. That fund will lose if there is another downturn, but likely - given the tools at management's disposal - not a ton (the fund lost in the teens % in 2008, then returned over 30% in 2009.
Pimco Unconstrained (PUBDX) is not going to offer really anymore than the CD (I believe the yield on that fund is around 2%), but is a highly flexible fixed income fund that can go just about anywhere and actually can position from a potential rise in interest rates. That fund is an absolute return fund (and it did do pretty well in 2008) where the attempt is to offer gains in any market environment. There is yield, but it is less a priority.
Pimco All Asset All Authority (PAUDX). Fund-of-funds, terrifically managed by the highly regarded Rob Arnott. Can short with 20% of the fund. Lost single digit % in 2008. Offers a nice yield.
An issue becomes that you are looking for a 4% yield that is "very low risk" - it doesn't really exist - in a world of ZIRP as far as the eye can see, people have bought up fixed income considerably and there's nothing (that I'm aware of) that is going to yield around 4% and not lose at least a fair amount if there's a real downturn.
I wouldn't necessarily run to treasuries, either. It doesn't yield much, but I do continue to like Pimco Unconstrained as sort of an "all weather"/"go anywhere" attempt to have exposure to the bond market, as I think what may be considered "low risk" assets today may not be tomorrow or a year from now, and I think the flexibility is a priority.
On another note, for a 7-year period, I would rather have my money in PAUIX / PAUDX than a 2.05% CD because of the risk of inflation. Is there an early withdrawal penalty for that CD?
Very interesting that both you and Scott mentioned PAUDX, which I like (and one I've been following) that also doesn't have a 2008 track record (also DIBCX in world bond category that has done extremely well).
If we went to the 7-year cd for the Roth, there would be a withdrawal penalty. We do have another option of just transferring currently expired temporarily to Roth savings account for 6 months or so with the chance that we will know more about whether this economy will tumble or not - and, if already crashed, would be a good time to add then.
Personally, we do not and find no reason to hold any CD at this time; as the end result is almost as bad as some investments, as the "real return" is negative when factoring inflation; and worse yet if the CD's are held in a taxable account. As to recession; I do believe it is still in place.
This would be my "convince" choice for a spouse or friend who is "itchy" about the markets:
A plain jane TIPs fund. Yes, I see the head shakers; but:
TIP, 3 year chart
TIP, M* performance page
The below article just popped up a few days ago.
TIPs in a brave QE3 world
TIP is representative of many managed TIPs funds; although, be aware some of these funds many also have up to a 20% exposure to corp. bonds; but generally AAA issues.
Many of the Real Return funds have either the ability or true exposure to TIPs holdings.
Not all TIPs active managed funds will perform in line with TIP; as managers position the holdings among duration types. Direct exposure to this area may be had via funds as:
STPZ or LTPZ.
TIPs, being U.S. gov't issues, of course; may provide and have proven of value when global markets as "itchy" about "things". May of 2010 and 2011 were itchy times; as well as August of 2011 with the downgrade of the U.S. credit worthiness. You may view these time periods in the 3 year chart for TIPs reactions to these events. May, 2010 through July, 2010 found about a + 2% and March, 2011 through Nov., 2011 found about a + 11%. Will there be swings? Yes, not unlike any other area. But, the price swings (for the past 4 years) won't cause one to spill their glass of wine onto the linen table cloth.
Yes, there will be those that think one is a fool to invest in an area that has a negative yield. The negative yield comes from "demand"; which, of course, drives the price upward. Our house does not hold TIPs for the benefit of yield, but to obtain the capital appreciation from the upward price. This is the driver with many bond funds today; not just a yield. Currently, our house will take both......thank you.
One other area of consideration, is low duration bond funds. I know there are other likely candidates; but my choice today (without further research) would be PLDDX. I note low/short duration, versus funds that may be named ultra-short bond funds; although some of these may do well, too; and may indeed have similar holdings. PLDDX also has a track record involving the 2008 market melt (- 1.6% ).
I know you are very good at digging into choices. Do not forget the easy finder here at MFO, from the gracious Accipiter; being the drop down menu of Resources at the MFO title bar.
Select navigator, in the "fund" box area, begin typing "inflation" and the TIPs related funds list will begin to populate. Do the same for the words "low duration" or "short duration".
The lists may not be totally inclusive, but fine lists, regardless. Obviously, you know of other methods you have used to find fund types, by naming/investing style.
Some of this was going to be a "Funds Boat" write, but your question finds the note here and now.
Lastly, TIPs can't and won't fix everything for a totally sleep easy investment sector. Rising interest rates will play into this area, too. As the global economy is still broken, our house doesn't have any problem with monies in this area, today. While there are many multi-sector bond funds that one may consider as a "core bond fund", I would also currently place a TIPs fund with a decent, long term track report into this area for some of one's holdings. The above 3 year chart may not be the best that one could find; but the 50, 100 and 200 lines tell some of the story, eh? One surely could do a lot worse.
If you choose to invest the Roth monies into TIPs, you may choose to use the TIP etf and obtain the lower E.R.
Disclosure: Can't fully determine via M* analyze; but about 15% of our bond portfolio mix is involved in some form of TIPs.
Gotta get back to work.
Take care,
Catch
Manager Rob Arnott is highly regarded, and I think PAUDX is really at the top of my list when it comes to "relatively stable" multi-asset funds for those in/near retirement age.
You can hear Arnott's take on the current economic situation here:
http://kingworldnews.com/kingworldnews/Broadcast/Entries/2012/9/13_Rob_Arnott.html (previous interviews with Arnott are listed on the side) and that may give you a better take on his take going forward in the near-to-mid term.
Scott,
How does Marketfield look for purchase in a taxable account? I have no room in my tax deferred accounts and I am in a fairly high tax bracket. When I look at M* 1, 3 and 5-Year Tax Analysis, the tax cost ratio is low, but of course, that is looking back. The fund does have a 132% turnover ratio.
On the related, what about the 9.58% in potential capital gains exposure for a taxable account when December is around the corner?
Mona
In June, Hussman's weekly commentary stated that we are in a recession right now.
Here,
WSJ Article
and,
Hussman June 12th weekly Market Comment
Seems like stocks and bonds are stumbling up hill on a "more-FED" drip.
But look at the debt now hanging there, with no place to go. If it falls apart again, sometime in the next five years or so, the government won't be able to do much of anything- they've already shot all of the big guns. Ain't no fund gonna help then.
Not sure cash in the bank is going to be there, either. Well, the corner bakery can always take gold. For awhile. Until the flour runs out. You think Cargill will be taking gold? You think Cargill will even be in business? Hello, Cargill? (I guess Verizon and AT&T aren't set up to take gold either.) Hello? Hello?
I am confused about your TIP recommendation. Aren't TIPs best used to combat inflation when one expects a recovery and not a recession? The negative yield doesn't bother me (since I don't withdraw any funds to live on) as long as the total return is good. But all TIPS lost too much for me in 2008. And, most importantly for this particular investment account, I don't want David to see losses in his account during extended downturns/recession.
I do have PLDDX on my Watch List - and those returns are more what I am looking for in this account. But my WEFIX that I've held for years has done better during down times (2.29% in 2008 vs the small PLDDX loss of -1.58%) yet still competitive in good times for short-term bond funds - and PLDDX has a very high percentage mortgage allocation which is one of my main problems in just going with most intermediate-term bonds as I don't know how all these mortgage investments will perform in the next crash.
P.S. I always enjoy reading your posts updating your investments - you've done very well with your bond funds portfolio! Thanks for keeping that updated.
P.P.S. Nice that you remembered my garden. After 3 months of repotting every one of my 650 Clivia (when so many diseased/infected after recent construction), I'll probably end up losing 100 of them.... but think the rest may recover so that's a big plus. VERY HOT, though, with 93 degrees here in Huntington Beach, California, which doesn't help.
Have you ever invested in a fund that had good, consistent track record and was recommended by many people... only to find that for the next 6+ months almost starting the very next day that fund goes substantially downhill against its previous track record? That has been my experience with Hussman. I've purchased HSTRX twice in the last 3+ years solely for its previous ability to do well during downturns, but each time I invest I seem to place a curse on Hussman's investments ... so have done him a favor by not investing in that again. My tolerance level for lengthy periods of downturns for a MF that I choose to lower risk is pretty low.
In HSGFX's case, I am generally not impressed with almost all long-short funds, and would rather have 1 good, steady equity along with 1 good, steady bond fund instead of 1 long-short.
Hussman's problem is that he has done an extraordinary amount of research (I mean, his weekly letters go into incredible detail, bringing together charts, historic examples, etc - there's clearly research), apparently none of which takes into account the effect of money printing and asset prices. He believes that central banks cannot avoid/buy their way out of recessions/depressions (which is what I believe he said to some effect the other week). That doesn't mean that they aren't going to try (to levels never before seen), and the possible effects of that should be considered. I also continue to not understand HSGFX's strategy versus Hussman's views. The options hedging strategy also seems overly complicated when the fund could be heavily cash, long some staples and low vol names and maybe slight hedging.
My thought is that if there is another crisis, it will look different than 2008. We are not going to have another 2008 where markets fall to that degree (you may have down days, down months, it's not going to be straight up - if it is straight up ... that could be problematic in ways) because you're just going to have more money printing. I mean, look at what happened: I thought we were going to get QE3 into a market decline - we got open-ended QE announced at a market high. The desire - without question - is to create inflation and cheapen the currency. That will help people who own financial assets, who will be able to stay ahead of inflation.
I mean, I can see a scenario where the DOW is at levels no one would have expected in 5 years, but a lot of the problems we face today still linger and things still don't feel good for much of the population, but the people who have financial assets feel at least okay and are to some degree going along. That will not help a lot of the small and large problems that exist, and I can see where it may lead to social unrest eventually.
I think the sad thing is that all I hear is QE, QE, QE. We have no plans for infrastructure, no real plans for education, a congress that can't agree on anything. So, in five years, inflation could result in DOW much higher, but the same aging infrastructure (which will probably cost more to fix - materials and otherwise, given inflation) and a lot of the problems that, had we actually directed some money to (infrastructure being a big one) instead of continually catering to whatever the banks wanted/needed (even years after 2008), could have actually created a lot of good.
Oh well.
However, other countries want to compete in that currency game, too. This makes for an excellent summary of the "Beggar Thy Neighbour" policy: http://en.wikipedia.org/wiki/Beggar_thy_neighbour
You're going to have central banks all over the world do "whatever it takes", but I think what's remarkable is that there are structural issues that need to be addressed and that are going to take time to fix, but there is no desire to do that - but you have to attempt to face some of these issues before you begin to get the possibility of a sustainable recovery.
I think this current situation will not end well, but I absolutely think the longer the can is kicked, the worse the end result is.
I definitely agree with mns on treasuries.
Elsewhere, the amount of interventions have become problematic, in that you have a situation where governments launch more and more rumors when something is not to their liking (oil too high? launch a rumor about releasing from the SPR, yadda yadda yadda), which I think is going to only further frustrate investors large and small.
But I don't understand your comment about treasuries (especially long-term) being a good place to invest in now to protect against the likelihood of the next crash (or at least strong downturn) - so I clearly don't understand treasuries. How can long-term treasuries be a good investment now when the rates are almost zero? Any chance you can give me a paragraph synopsis of how funds who buy treasuries at these ridiculous rates now can make any gains with these?
If you think there's going to be a recession soon, T's would be a logical place for some $. But given that there isn't as much upside (obviously) as there has been in the past, I'm more inclined to put $ for anti-recession (counterweight to stock) purposes into diversified, core bond funds that are doing well now on days when T's rally a bit -- and there are a lot of those around to choose from.
Cheers, AJ
I don't think treasury bonds are scary, but that it does not make fundamental sense to invest in them at this point.
That said, we live in an economic environment where things do not always make fundamental sense, especially when central planners feel the need to continually intervene.
I will not own a t-bond fund and don't even find a lot of fixed income sectors that appealing at this point. However, with an AQR Risk Parity, for example, I can have some exposure to global fixed income (the primary holding of which portion, last I looked, is US treasuries) because, you never know. What if ZIRP (Zero % Interest Rate Policy) turns to NIRP (Negative IRP)?
Gundlach was exaggerating on CNBC to some degree when he said it was more likely the Fed would buy every single treasury bond in existence than it is that they will begin to unwind what they've done any time soon (and he couldn't imagine how they could even begin to), but, with the world we live in, who knows - the Fed won't buy every treasury, but it was stated with QE3 that they could consider other assets and expand it if they did not feel they were getting the desired results.
I like Pimco Unconstrained - a fund that can pretty much "go anywhere" in the fixed income market and benefit to some degree if rates rise. It's not going to hit home runs and doesn't provide much yield, but in a market where I think what's considered "safe" now may not be six months from now, I like an "all weather", highly flexible fund.
Or, something like Permanent Portfolio, that does have some exposure to treasuries, although I like AQR's actively managed and much broader/global Risk Parity fund a great deal more.
So, it's not that treasuries are a "good" investment or do I feel that they make fundamental sense to invest in at this point. However, that doesn't mean that there can't be some scenario where they continue along.
My focus continues to be hard assets, which I think will certainly be volatile, but will - I believe - fare well over the next decade.
As for the economic environment as a whole, QE, etc, Karl Denninger provides an excellent discussion today on Market Ticker about what's going on and aspects of why it's not working. I don't really agree with his view of the possible effects of what's being done, but I think his discussion of some of the current realities is worth reading
http://market-ticker.org/akcs-www?post=211805
Or hedge fund manager David Einhorn's very calm questioning of policy on CNBC to former Fed Governor Larry Meyer (who becomes completely frazzled) a couple of years ago, where Meyer had difficulty responding to simple notes like, "I think you can argue that, because we have gotten to the point where the transmission method [sic] is broken. You are trying to create a wealth effect which is another asset-based economy thing, putting aside the income distribution problems of that, it's very questionable whether higher stock prices cause lots of incremental demand, and you have the cost of food and energy which are real things that people have to pay for. And if you have to pay $3, $4 or $5 for gas, you have less money to go out to eat."
http://www.zerohedge.com/article/watch-david-einhorn-makes-mockery-one-man-fed-expert-network-larry-meyer
Finally, another fun read from the other day, and completely freakin' true.
http://www.telegraph.co.uk/finance/comment/jeremy-warner/9554201/Money-printing-has-only-allowed-governments-to-duck-their-problems.html
It becomes taking all of these things into account and one's view of where things go if the current situation is allowed to go on for years. I may come up with a different view of where that leads than someone else, but that's investing.
also, i just paid attention to your heading. the question you raised is not prudent. there are really several economic environments that are relevant to asset classes performance: inflation, deflation, stagnation, stagflation and reflation. when you talk about recession -- and you expect it to be accompanied by deflation, then there is nothing better than long US treasuries. but it is a gamble, right? you really don't know. the fed seems to be pursuring a reflation policy -- to inflate risk assets, so equities and commodities should, at least in theory, perform much better. something like "stagflation" - stagnant growth with higher inflation -- would be terrible for all assets, but cash. there is no free lunch as you well know.
You noted: "I am confused about your TIP recommendation. Aren't TIPs best used to combat inflation when one expects a recovery and not a recession? The negative yield doesn't bother me (since I don't withdraw any funds to live on) as long as the total return is good. But all TIPS lost too much for me in 2008. And, most importantly for this particular investment account, I don't want David to see losses in his account during extended downturns/recession."
>>>>> First, I must state that everything is on the economic table at this time. The central bank money pump can indeed suggest inflation in some areas, at some future point in time. As fundalarm noted in a reply to you; inflation can take place within a stagnant economy. I suspect a major reason, at least for our central bank, for throwing more money against the problems is the fear of deflation. Inflation at some point may be slowed or killed down, as in the early 80's via high interest rates and other tools. Deflation, likely based more upon a retraction of consumer spending, when all other tools have failed to "stimulate human beings" into consumerism, is a much harder circumstance, with which to deal and/or overcome.
TIPs were noted as a possible choice area, as I suspect a sideways market(s) to continue for some time; barring any major events. Unfortunately, there are too many possible unknowns going forward; at least for the next 6-9 months.
Which TIPs funds that you held lost too much in 2008?
A quick look at TIP from 2008:
---The high dollar value was March, 2008 at $95, the low dollar value was in Nov., 2008 at $89. Jan. 3, 2008 found TIP at $90.30 and closing the year at $89.
If one placed an entire purchase in March and and sold all in Nov, the loss would be about -13%. The same scenario from March to year end would find about a - 6.3%. Same scenario from buy, Jan., 2008 and sell in Nov, 2008 the loss would be about - 8%. The overall 2008 return was about -1.4%. If one had been dollar cost averaging during the entire year, the return would have been about breakeven and perhaps slightly positive.
Similar time frames/numbers/percentages apply to PLDDX in 2008.
Yes, one could have lost more than 2% in TIPs during 2008, depending upon entry points of purchase and related sell dates.
Keep in mind that our house portfolio comes from a +90% equity position prior to June, 2008.
The learning curve is still in play here.
Lastly, there are more than enough folks in this country at this time who consider the economy to be in a depression, relative to their monetary position and likelyhood of gainful employment with which to dig themselves out of a monetary hole.
Many or most of us here are fortunate from our skills and/or abilities to find ourselves in a much different position at this time.
Back to work I must be...........
Catch
Long treasuries have traditionally done well in recessions for two reasons:
1) People rush for safe havens and treasuries are considered safe haven.
2) Typical reaction of central banks (and out Fed) is to lower interest rates during recessions. When interest rates are lowered, long treasuries having longer duration goes up the most. This has been a counter balance to equity portfolio.
But Fed is only directly able to control the short end of the curve. So the short end moves do not directly effect the long end the same amount. But since the duration is long, the percentage change is still big.
Now, with the interest rates at rock bottom, the short end curve manipulation is out of question. They only way interest rates can be manipulated is via bond purchases by central banks which are know as quantitative easing (QE) QE does not have as clear cut effect as lowering interest rates outright so it will be more muted.
In other words, if recession hits long bonds can still appreciate but not as much as the previous recessions.
I hope this helps.
Your change from +90% equities prior to 2008 to your current portfolio is remarkable and impressive.
Reply to @Mark: Thanks for the suggestion, Mark. I have DBLTX in my other account and have been very happy with it. But since this fund wasn't alive in 2008 and, again, this one has significant allocation to mortgage-related investments, this scares me a little as a 1-fund investment for this particular account since I don't know how these type of investments would do in a crash. I definitely don't understand these well enough to feel comfortable.