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To dump equities or not...

To dump equities or not...

Old Mar 24th 2015, 8:09 pm
  #1  
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Default To dump equities or not...

Hmm, so everyone is starting to panic that the Fed is going to raise interest rates and that will cause a market crash as everyone piles into bonds.

So if I cash everything in, I avoid that problem but obviously I've then crystallized my gains and get a whopping bill for capital gains tax. But at least I get the capital gain...

Hmm... bit of a tough one.
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Old Mar 24th 2015, 8:24 pm
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Default Re: To dump equities or not...

Hmm ... got an email from my 403b provider yesterday, "Tips to weather volatile markets." What volatile markets? Doesn't it go up every day? Is it time to go to bed and keep my head under the duvet??
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Old Mar 24th 2015, 8:32 pm
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Default Re: To dump equities or not...

If you've got it in a 401(k), IRA whatever it's a pretty simple call really, I tend to think it would be a good idea to dump everything, wait to see how it shakes out then buy it all later.

If it's not in a tax shelter though you're looking at a potentially whopping capital gains bill because you wouldn't ordinarily dump everything at the same time.
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Old Mar 24th 2015, 9:37 pm
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Default Re: To dump equities or not...

Investing is confusing in today's market. The ECB announced at the end of last year it would start QE and the Euro market has done well since the beginning of the year. Therefore you may think you should have invested in the Euro market equities but the Euro in relation to the US dollar has dropped more in value than the Euro market indexes have gained since the beginning of the year (except Germany and Italy).

Investing in government bonds seems crazy. 10 year Swiss Bonds are yielding -0.12%, Germany at 0.23%, Japan at 0.30%, Netherlands at 0.31%, France at 0.51%, Spain at 1.28%, Italy at 1.32%, UK at 1.50%, and the US at 1.87%. You can invest in riskier bonds such as Greece at 10.57%, India at 7.75%, or Brazil at 4.47% but that doesn't make any sense either.

Government Bond Yields - Bloomberg

Currently I have a large percentage of my investments in large bank preferred shares that are yielding over 6% and the dividends are qualified. Initially I was going to watch the government bond market carefully and try to sell my preferred shares before the government bond markets started their rise. However if I sold the preferred shares, I wouldn't be comfortable investing the proceeds in the equity markets since I suspect they will be very volatile for the next several years. Therefore if I sold the preferred shares, I'd probably put the money in 1% or less saving's accounts with that being taxed as normal income.

Therefore what to do? The Federal Reserve will likely raise interest rates later this year to put something back into their toolbox. The Federal Reserve raising the target rate does not necessarily raise long term rates since the Federal Reserve's decisions only have a direct effect on short term rates and the market decides long term rates. You would think that if the US 10 year T-Bond was yielding 5%, investors from around the world would be buying them and that would force the rate back down. Why would someone purchase 10 year Italian bonds yielding 1.32% when they could buy US T-Bonds yielding 5%?

Therefore I suspect it will be quite a while before 10 year US T-Bonds will go above 3%.

So I decided that I will hang in there and continue to hold my large bank preferred shares. It seem hard to imagine that banks like JP Morgan, Bank of America, HSBC, Barclay's, Deutsche Bank, or ING would default on dividends for preferred shares and that 10 year T-Bonds would rise significantly in the current environment. In fact if those banks defaulted, it is likely that the world would go into a depression and then there wouldn't be a safe place for money anywhere including insured deposits in banks. Therefore even if 10 year T-Bonds rose to 3%, the market value of my preferred share may drop about 6% but that isn't any worse than putting my money in a bank account since I would be offsetting the market value loss with dividends of over 6%.

Last edited by Michael; Mar 24th 2015 at 9:49 pm.
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Old Mar 24th 2015, 10:18 pm
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Default Re: To dump equities or not...

Originally Posted by Steve_ View Post
If you've got it in a 401(k), IRA whatever it's a pretty simple call really, I tend to think it would be a good idea to dump everything, wait to see how it shakes out then buy it all later. ......
All or nothing is a risky strategy too, but about 40% of my 401k is in cash or similar investments. So I've had some healthy gains in recent months, but I am ready to pounce when there is a meaningful correction.
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Old Mar 24th 2015, 10:40 pm
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Default Re: To dump equities or not...

Originally Posted by Pulaski View Post
All or nothing is a risky strategy too, but about 40% of my 401k is in cash or similar investments. So I've had some healthy gains in recent months, but I am ready to pounce when there is a meaningful correction.
Market timing is not a long term strategy. When interest rates go up equity and bond funds will lose value. If you stay in the bond funds you'll gradually get back money as the higher interest rates take effect, but expect 2% or 3% annual gains for the next decade.

Personally I just rebalance my portfolio whatever happens and that's seen me ok for the last 30 years and I expect it to work for the next 30 too.
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Old Mar 24th 2015, 11:48 pm
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Default Re: To dump equities or not...

Originally Posted by nun View Post
Market timing is not a long term strategy. When interest rates go up equity and bond funds will lose value. If you stay in the bond funds you'll gradually get back money as the higher interest rates take effect, but expect 2% or 3% annual gains for the next decade.

Personally I just rebalance my portfolio whatever happens and that's seen me ok for the last 30 years and I expect it to work for the next 30 too.
I am not sure if you are criticizing me or agreeing with me, though it sounds more like the former than the latter. Anyhow I have made some adjustments progressively, "rebalancing" if you like, over the past three years. Having watched several short term blips over the past year I am not intending to dump 40% of my 401 back into equities on the same day. I expect to make progressive adjustments when I feel the time is right. ...... And to make sense of my 401K you need to know what investments I am holding outside my 401k.
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Old Mar 25th 2015, 12:01 am
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Default Re: To dump equities or not...

Originally Posted by Pulaski View Post
I am not sure if you are criticizing me or agreeing with me, though it sounds more like the former than the latter. Anyhow I have made some adjustments progressively, "rebalancing" if you like, over the past three years. Having watched several short term blips over the past year I am not intending to dump 40% of my 401 back into equities on the same day. I expect to make progressive adjustments when I feel the time is right. ...... And to make sense of my 401K you need to know what investments I am holding outside my 401k.
All my investing decisions are reactive rather than proactive....that sounds rather bad, but it means I'm acting on facts rather than assumptions. I lag the markets a bit, but as my time horizon is years, a months lag on reacting to market movements isn't an issue. I have a 75/20/5 asset allocation, it's higher in equities than many people of my age because I can rely on a pension for my retirement income. Each month I look at my AA and simply rebalance if there's a 5% divergence from my specification. I don't think about the future or listen to what anyone says, I just blindly rebalance. It takes all the worry out of investing and has worked well.
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Old Mar 25th 2015, 12:54 am
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Default Re: To dump equities or not...

Good thing I have no investments to worry about..

Trying to understand anything related to investing is mind boggling confusing, plus if you don't have the money to lose, not sure investing is wise, but I dunno.
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Old Mar 25th 2015, 8:25 am
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Default Re: To dump equities or not...

Dump them all. The sky is falling.
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Old Mar 25th 2015, 12:43 pm
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Default Re: To dump equities or not...

Originally Posted by dunroving View Post
Dump them all. The sky is falling.
The sky is falling is the same thing as pulaski's "correction?" Or one is worse than the other?
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Old Mar 25th 2015, 5:51 pm
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Default Re: To dump equities or not...

Originally Posted by nun View Post
If you stay in the bond funds you'll gradually get back money as the higher interest rates take effect.....
I'll agree with that statement but the last 35 years has been an unprecedented 'bull market' in the bond market as long term government western government bonds have gone from double digit interest rates to near 0% interest rates. In that type of market, the investor was not at risk since he/she could hold older bonds that were paying a higher interest rate than the current rate or sell the bonds if the money is needed and make money on appreciation of the bond values. In today's market, the opposite is likely true with western government bond interest rates at all time lows and the investors will always be behind the curve ball if interest rates rise being stuck with lower than market interest rate bonds or a decreased bond market value if the bonds need to be sold to raise cash. The high rated investment grade corporate bonds are much the same which also have all time low interest rates.

In the current market, it appears to be very risky to invest in western government bonds or high rated investment grade corporate bonds and some 'experts' suggest investing in high yield corporate bonds (junk bonds) which may be paying 6%-7% to hedge against interest rate rises ensuring a decent return. However there is a flaw in that strategy in that corporate high yield bonds are typically financing companies that are on the brink of bankruptcy and if interest rates rise, high yield bond interest rates usually rise even faster and companies that need to float new high yield bonds can't afford the debt load or can't find investors to take the risk and often go bankrupt.

Therefore I've looked at an alternative which is high yielding large bank preferred shares and hope that the past is an indication of how the future will react. In the past, banks have always performed better in a recovering economy and therefore bank preferred shares have basically held their value during rising interest rates since the risk is reduced. In the past, the spread between large bank preferred shares and 30 year T-Bond interest rates have been about 1.5% during a recovering or growing economy but now it is currently about 4%. I initially looked at investing in preferred share funds but I didn't like those because of the following.
  • A 0.5% or greater expense ratio.
  • The funds held a mixture of preferred shares to apparently reduce risk but the funds held preferred shares for everything from large banks, REITS, public storage units, utilities, small banks, very risky companies, and other holdings that didn't seem very safe.
  • Poor tax efficiency as the fund traded too often creating unanticipated capital gains and purchased preferred shares that paid non qualified dividends raising the investors tax liability.
  • A lower return than I could get by purchasing preferred shares directly.
  • No control over what the fund manager was purchasing or selling.

Last edited by Michael; Mar 25th 2015 at 6:09 pm.
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Old Mar 26th 2015, 3:01 am
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Default Re: To dump equities or not...

If you hold bond funds for the next 10 years you'll probably make 2% or 3% a year......that's just using the yield on 10 year US Treasuries as a predictor. That's still useful as a volatility dampener in a portfolio. You could look at "Target date" bond funds or individual bonds. Personally I'm lucky enough to have TIAA-Traditional and that is paying 4.5% today and will go up if interest rates go up so that's my fixed income play.
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Old Mar 26th 2015, 4:35 am
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Default Re: To dump equities or not...

Originally Posted by nun View Post
Personally I'm lucky enough to have TIAA-Traditional and that is paying 4.5% today and will go up if interest rates go up so that's my fixed income play.
I always cringe a bit when I hear "guaranteed" and "annuity" together. According to the following, this TIAA Traditional Annuity has the following guidelines and investment limits.

The Account follows specific guidelines and investment limits, including 85% bonds, 10% conventional mortgages and 5% investment real estate. Sectors are limited to 40% corporate bonds, 25% residential mortgage backed securities, 10% asset backed securities, 15% commercial mortgage backed securities and 3% preferred stock. Quality limits include 10% below investment grade assets.

TIAA Traditional Annuity

A TIAA Traditional Annuity appears to be just another way to invest in the fixed income market. The only advantage of an annuity over other fixed income investments is it can be tailored to the recipients desires.

Last edited by Michael; Mar 26th 2015 at 5:09 am.
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Old Mar 26th 2015, 5:08 am
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Default Re: To dump equities or not...

Originally Posted by Michael View Post
I always cringe a bit when I hear "guaranteed" and "annuity" together. According to the following, this TIAA Traditional Annuity has the following guidelines and investment limits.

The Account follows specific guidelines and investment limits, including 85% bonds, 10% conventional mortgages and 5% investment real estate. Sectors are limited to 40% corporate bonds, 25% residential mortgage backed securities, 10% asset backed securities, 15% commercial mortgage backed securities and 3% preferred stock. Quality limits include 10% below investment grade assets.

TIAA Traditional Annuity

A TIAA Traditional Annuity appears to be just another way to invest in the fixed income market.
TIAA-Traditional is a very particular fixed income vehicle. I have a guaranteed annual return of 3% and they declare a bonus rate each year this year its 1.5%. It also has a vintage structure so that money I invested back in 1990s gets a higher rate, right now 4.75%. You can get at principal, but only over 10 years, take interest income, do systematic withdrawals or turn it into a true fixed annuity. It's been around since 1918 and was the default college teachers' retirement fund for a long time. It's a nice thing to have instead of bonds.
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