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Between the Fed driving rates to unsustainably low levels and the bubble resulting from the public rush into bonds, is it time to sell all bond funds? If so, what are some options to replace the typical bond portion of a portfolio? Here I am looking for funds which have a low correlation to stocks yet throw off some yield. Ideas?
I think it really depends on your age, risk tolerance and other factors. I would not dump all bonds and some bonds may continue to fare well. I'm not going to call bonds a bubble, but I would be aware that bonds have - or are probably not that far from - a period where they've seen their best days (for a while - who knows how long.) Whether it's Apple or bonds or whatever, I don't particularly feel comfortable being in an investment/sector where everyone and their cousin has rushed to (Apple being another example - no offense to Apple fans), and would like to be out of the way a bit before the eventual turn, keeping in mind that there's no way to time that. One could go into a fund like Pimco All Asset/All Authority or other flexible fund and allow the manager to make choices on how to allocate (or not) to fixed income.
As for what else, pretty much everything else is going to suggest some greater degree of risk and volatility. If you give us a better sense of age/risk tolerance, we would be happy to offer some suggestions.
Bond managers we have talked to recently tell us they will be glad to cover their coupon going forward. In other words, the gravy train of 10% and higher returns is over in their opinion. They believe they should be able to pay out their dividends, but that's about it. As for selling, I would certainly not want to be in medium-to-long Treasuries. Funds with flexible strategies and those with very short durations would seem to be in the best shape. And I would certainly want to have some non-dollar exposure if the dollar comes underpressure.
I just can't imagine whip-sawing yourself around, getting 100% out of one space in the Market and loading up on everything else, or any one item, like stocks or what have you. I'm overweight (still) in PREMX, with a nice monthly dividend---which I've not even begun to tap, yet, in a Trad. IRA. I can recommend FNMIX, too.
(Quoting:) "...some options to replace the typical bond portion of a portfolio? Here I am looking for funds which have a low correlation to stocks yet throw off some yield. Ideas?"
Another idea: MAPIX and MACSX. But you're looking for a "low correlation to stocks." With globalization, I dunno where you're going to invest in the way you describe. Art and physical gold "investments" are actually a matter of engaging in speculation. Apart from the above, I'm out of ideas for you. "Break a leg!"
First, I'd suggest classifying bond holdings into something like these categories:
* "Safe" (intermediate or long, half or more in gov't issues, all investment grade, e.g., U.S. bond index funds); * Core (mostly but not all investment grade, good mix of U.S. sectors, maybe a little foreign), and * Strategic/riskier (including a fair chunk of holdings such as hi yield, EM, international developed, private mortgage, asset-backed, etc.)
... and then, move a small tranche at a time from safe to core and core to strategic, and bond to allocation or SAFER stock, taking what the market gives you; safer stocks, because stocks aren't cheap either. Then be prepared to reverse the trade, because stocks can dive a lot deeper than bonds, and there will be periods when somewhat uncorrelated bond holdings will provide a better night's sleep than, say, all stocks and high-yield bonds.
Ten, fifteen year out, returns on bonds aren't going to look great. But it really all depends on what you're comfortable holding. It also depends on how much money you have, because series I bonds are much more attractive than treasuries, but you can only invest relatively small quantities. Same thing with FDIC insured accounts, but the limits are much higher.
Before you sell all your bonds, look at what long duration treasuries have done in the last couple of years. They've done really, really well during a period of time when everyone said interest rates were going to rise. Is that going to continue? Probably not, but who knows.
I'd keep in mind two things, one if you already hold a position, changes in the price don't change the income stream you get, simply the mark to market value which only matters if you sell. Two, if you reinvest at least part of the yield, falling prices makes you money because your prospective rate of return is higher.
Do you need to sell capital to pay for current or future expenses? Yeah, then it might make sense to sell bonds in leu of equity right now. Otherwise what are you going to do with the money? Cash isn't super different than a bond, arbitrage or "alternatives" are basically scams, and equity is a different beast all together.
I have not sold out of bonds but have moved into multi sector funds such as offered by Loomis Sayles or Pimco. Now you can appreciate the expertise of a bond manager and the expense they charge is well worth it. It is impossible for a single investor to know all the in,s and out of bond investing. Bonds are much more difficult for me than equity funds. prinx
As a partial counter to what Joe is apparently hearing from the hair-on-fire soothsayers of cable "bid'ness" networks, etc., here via a Barron's blog is a more measured piece from Fidelity:
A more apt title and question would be "Time to Dump *SOME* Bond Funds" instead of *ALL*. It looks like Treasuries and Munis have had it. If selling picks up in those areas I would think investment grade corporates would be next followed by high yield corporates. I am now around 94% PONDX and 6% SUBFX. Would like to just stay on auto cruise there for 2013. Will keep a 1% mental stop from highs on PONDX.
All this obsession (and I am guilty) on the bond bubble when the real selling has been in gold and silver.
Reply to @MaxBialystock: For emerging market bond exposure, I prefer the ETFs EMB or PCY. You can take a look at this chart. You would need to add these symbols to the box above the chart to compare PREMX with these two ETFs.
For bond-investing in my tax-sheltered portfolio, I just follow the shorter term trends 3M and 6M. PCY is leading at the moment and I have 25% in there. The others ETFs I am currently in are EPP, RWX and EFV.
Reply to @hank: Since everyone on this board seems to have different goals, time frames, and risk tolerances, I am not into recommendations. PONDX is severely overbought. But it has been that way much of 2012. I always have my finger firmly planted on the eject button as I believe it is our exits not our entries that determine our long term success in this game.
Reply to @hank: lol. that's why i haven't responded. he wants to sell bonds, wants yield and no correlation to stocks. some magic asset is yet to be discovered.
Comments
As for what else, pretty much everything else is going to suggest some greater degree of risk and volatility. If you give us a better sense of age/risk tolerance, we would be happy to offer some suggestions.
I just can't imagine whip-sawing yourself around, getting 100% out of one space in the Market and loading up on everything else, or any one item, like stocks or what have you. I'm overweight (still) in PREMX, with a nice monthly dividend---which I've not even begun to tap, yet, in a Trad. IRA. I can recommend FNMIX, too.
(Quoting:) "...some options to replace the typical bond portion of a portfolio? Here I am looking for funds which have a low correlation to stocks yet throw off some yield. Ideas?"
Another idea: MAPIX and MACSX. But you're looking for a "low correlation to stocks." With globalization, I dunno where you're going to invest in the way you describe. Art and physical gold "investments" are actually a matter of engaging in speculation. Apart from the above, I'm out of ideas for you. "Break a leg!"
* "Safe" (intermediate or long, half or more in gov't issues, all investment grade, e.g., U.S. bond index funds);
* Core (mostly but not all investment grade, good mix of U.S. sectors, maybe a little foreign), and
* Strategic/riskier (including a fair chunk of holdings such as hi yield, EM, international developed, private mortgage, asset-backed, etc.)
... and then, move a small tranche at a time from safe to core and core to strategic, and bond to allocation or SAFER stock, taking what the market gives you; safer stocks, because stocks aren't cheap either. Then be prepared to reverse the trade, because stocks can dive a lot deeper than bonds, and there will be periods when somewhat uncorrelated bond holdings will provide a better night's sleep than, say, all stocks and high-yield bonds.
Before you sell all your bonds, look at what long duration treasuries have done in the last couple of years. They've done really, really well during a period of time when everyone said interest rates were going to rise. Is that going to continue? Probably not, but who knows.
I'd keep in mind two things, one if you already hold a position, changes in the price don't change the income stream you get, simply the mark to market value which only matters if you sell. Two, if you reinvest at least part of the yield, falling prices makes you money because your prospective rate of return is higher.
Do you need to sell capital to pay for current or future expenses? Yeah, then it might make sense to sell bonds in leu of equity right now. Otherwise what are you going to do with the money? Cash isn't super different than a bond, arbitrage or "alternatives" are basically scams, and equity is a different beast all together.
Now you can appreciate the expertise of a bond manager and the expense they charge is well worth it. It is impossible for a single investor to know all the in,s and out of bond investing.
Bonds are much more difficult for me than equity funds.
prinx
http://blogs.barrons.com/incomeinvesting/2012/12/20/fidelity-dont-count-on-bond-bubble-or-a-bursting/
All this obsession (and I am guilty) on the bond bubble when the real selling has been in gold and silver.
You can take a look at this chart. You would need to add these symbols to the box above the chart to compare PREMX with these two ETFs.
http://quote.morningstar.com/fund/chart.aspx?t=PREMX®ion=USA&culture=en-us
For bond-investing in my tax-sheltered portfolio, I just follow the shorter term trends 3M and 6M. PCY is leading at the moment and I have 25% in there. The others ETFs I am currently in are EPP, RWX and EFV.