I have a portion of money in asset allocation and rebalance . Sounds good? In the present market my equities have done well and are out of proportion with my municipal bonds. Knowing that bonds future are bleak should I keep on rebalancing into bonds to keep the original proportion that I set up? Or should I face reality that interest rates are going up and just the threat of that fact is making the bond prices fall? This can keep the bond market depressed for many years. My desire to keep the original balance has lessened.
How do others feel?
prinx
Comments
Personally, I believe that we are in a period of extraordinary uncertainty, without historical precedent for the spectrum of interrelated economic and political forces which are in play right now. I really think that none of the time-honored allocation schemes will give predictable results, at least for a couple of years when hopefully things may settle into a more normal historical pattern.
I'm not saying that the present uncertainties are going to be permanent, or that the time won't come when "standard strategies" of allocation, buy-and-hold, and so forth may not work reasonably well once again. I do strongly believe that residual aftershocks of the market-shaping turmoil of 2008/09 are still reverberating, and that there are some economic and political realities at work which don't really have good precedents for comparison. Among these are-
• The nearest recent comparison to recovery from the 08/09 implosion would be the great depression. The eventual recovery from that was largely based on the following world war and it's aftermath. That model isn't applicable to predicting the present semi-recovery.
• You have the Euro situation: a totally unprecedented alliance of major and minor European powers, who created this alliance as a result of and to prevent a repetition of the Second World War. Because there has never been a European alliance of this sort before, there is absolutely no way to predict how or if they will successfully work their way out of their present economic difficulties, and that situation impacts not only the US but also the emerging market group of nations. We all buy and sell stuff to each other.
• There have always been "emerging" countries which were "undeveloped" with respect to America or Europe, but previous iterations had these countries pretty well locked in as controllable "colonies" of the major powers. For the first time in history the majority of these countries are engaged in a mutual financially interdependent relationship both with each other and with the more developed world powers.
• China, economically and militarily. A game changer all by itself.
• The speed of modern communications and transport have increased the information flow wildly beyond anything previously experienced in history. This in turn has dramatically increased the economic coupling and volatility of the world economy, and of the various economic instruments available to investors. Additionally, the social networking aspects introduce a potentially destabilizing political factor never before experienced in world history.
• Central banks world-wide are in the midst of using various economic levers which are largely untried, at least on this scale. So far, reasonably so good- but we really don't know how this is going to play out in the long run.
• Note that I'm not going to include the Mideast political and religious turmoil as an unusual factor. While the world-wide energy issues will be affected in various degrees at various times, and thus have some input to the overall financial equation, that part of the world has been so volatile for so long that it seems to me to be almost normal in it's historical perspective.
Bottom line: I think that each of us is going to have to be ready to change our personal strategies much more nimbly than before, especially those of us who are older and may not have the longer timeline to allow the the law of averages to heal major disruptions. I'm hoping that for the younger folks time will smooth out their investment horizon so as to provide a less volatile long-term picture.
Hope all of this may help in some way.
Regards- OJ
On your asset allocation I have a range that I try to keep my asset allocation within. For example for equities it is forty to sixty percent. In times when I feel stocks are oversold I will govern towards the high end of this range and when stocks are overbought I will govern towards the low range. With fixed income the same theme applies as there are better times to hold bonds than others. Currently, I am moving towards the low range of my allocation to bonds. Within the remaining assets to choose from that leaves cash and alternatives. Since, I am at the top of my allocation to alternatives at about ten percent that means any reductions have to go to cash and with this I am now at about 20% cash.
My late father use to carry high cash levels as part of his allocation plan. It was not uncommon for him to be 25% cash, 25% fixed income, 25% equity and 25% real estate. My father, most of the time, had the money, in hand, without having to borrow to pursue most any reasonable special opportunity he chose to pursue within his capacties, of course. As I am approaching retirement I am starting to build my cash to pursue special opportunity much like he did. Just because I am retiring from the working world does not mean I am not going to make my money work for me though some other endeavor and occupy my time in a more leisure but productive profitable way.
Currently, I am within my asset allocation of about 20% cash, 30% income, 40% equity, and 10% alternatives. I might be raising cash and reducing fixed by about another five percent, or so, in the near term. For me, fundamentals are not in place to support current equity valuations as I feel the markets have been talked and pushed upward by leveraged and cheap money. This has, form my thougts, created a hot stock market. And, with fixed income … in a rising interest rate environment … well, most fixed income type products will suffer over the next couple of years. I don’t consider my real estate holdings as part of my investment allocation as my father did … only the assets that can be readily sold at, or less than, T+3 days settlement. I truly think there are some strong headwinds coming not only for fixed income but equities as well. Remember the sequester. I think things are going to go soft ... all around.
Not sure this has helped … but, it is currently how I see things.
Best regards,
Skeeter
Another suggestion is to rebalance into a conservative "fixed income" segment (as opposed to a strictly bond segment). You would structure that segment to have as much or as little sensitivity to "rate risk" as you feel appropriate in this day and age. This is pretty much my approach - as I haven't liked most bonds for a long time.
If I may be permitted an observation: A key premise behind the rebalancing theory is that we don't know which way a given market (bonds, stocks, etc.) is going to move next. When we begin to allow our own predictions (no matter how well-founded) to affect our rebalancing decisions, we stray from the underlying premise. Hope doesn't sound critical. (It's battle I often fight with myself:-). ... So, your question is both a good one and a natural one.
Also, your admonition regarding "straying from the underlying premise" is absolutely valid. The problem right now is that every strategy which has been historically employed by small investors depended upon some fundamental basic relationships in the financial markets. And there was usually enough decoupling in the various market products so that it made sense to spread your bets around. I'm not at all sure that that situation exists at the present moment, due to many of the forces which I've mentioned above. Again, the problem is much more acute for older investors, as one nasty lurch can take you down for four or five years, per 2008/09. For us, I'm thinking that being "in or out" may be more important than being "in and where" with respect to asset conservation and protection.
Regards- OJ
Added note- for an example of what I mean, check out the observations regarding complex economic interrelationships in this article:
What’s Good for U.S.-China-Japan Hurts Emerging Markets
"What’s good for the global economy’s superpowers risks creating losers in other parts of the world"
⇒ Link to Bloomberg Article
From Ben Franklin: “If everyone is thinking alike, then no one is thinking.”
Franklin and Keynes- two of my favorite historical figures.
Oops ... In haste to respond to the link, I failed to mention your salient observation. Worth repeating here in case anyone missed it:
"The problem right now is that every strategy which has been historically employed by small investors depended upon some fundamental basic relationships in the financial markets. And there was usually enough decoupling in the various market products so that it made sense to spread your bets around. I'm not at all sure that that situation exists at the present moment ..."
Well Said OJ... But "admonition"? Hmm ... wasn't so intended. First, tossed out two "real world" solutions to the question prinx posed. Than added a more "academic" (theoretical) way to look at the issue. (Just trying to tack her all down around he edges:-) FWIW
From Ben Franklin: "A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines."
Hmm. Guess Emerson stole it:-) http://www.goodreads.com/quotes/353571-a-foolish-consistency-is-the-hobgoblin-of-little-minds-adored
I think Ben's advice was to go to cash: "A penny saved is a penny earned."
http://www.goodreads.com/quotes/5986-a-penny-saved-is-a-penny-earned
BTW - the key word in your quote is "foolish", and the skill is in knowing when to break the rules.
I shoot for 50% of the S&P with approximately 50% of the S&P volatility, and so far, so good. Yes, we did get back in at the right times. Maybe luck- can't say for sure. Not talking frequent trades here- just in/out adjustments.
For example:
at end of 2011, spread was 9% Equity/43% Bond/48% Cash;
in July of 2012, spread was 19% Equity/33% Bond/49% Cash;
at end of 2012, spread was 32% Equity/25% Bond/43% Cash;
in early May 2012 was 38% Equity/17% Bond/45% Cash;
and now is 15% Equity/4% Bond/81% Cash.
Took the 8% ytd profits which were in addition to 12% from 2012 (close to 100k) in 2nd qtr. Not too bad when bank savings rates are non-existent. No need to be greedy- that will cover most of the current house remodel. Will dca back in after Fed issues are settled. Remember that I'm talking an older investor here- wouldn't necessarily recommend this for younger folks. If I miss some of the froth this year that's OK- I'm sleeping really well.
Well, maybe "observation" or "caution" might be better than "admonition". Didn't intend to be harsh.
cf: my response to Investor, below. Yes indeed.
*** "I wake up every morning at nine and grab for the morning paper. Then I look at the obituary page. If my name is not on it, I get up.”
*** "Many people die at twenty five and aren't buried until they are seventy five.”