TAG | Portfolio
21
Treasury Funds: Get These Time Bombs Out of Your Portfolio
0 Comments | Posted by Alexander Green in Alexander Green
Treasury Funds: Get These Time Bombs Out of Your Portfolio
by Alexander Green, Chief Investment Strategist
Monday, June 21, 2010: Issue #1285
Tens of millions of investors have a ticking time bomb in their fixed-income portfolios.
Are you one of them? If so, there’s still time to defuse it.
A few weeks ago, I wrote an Investment U column entitled, “Why the Safest Investment is Now One of the Riskiest.”
I noted that investors – frustrated by the microscopic yields on money market funds and certificates of deposit (CDs) – have poured money into longer-term Treasury funds.
Their thinking is simple. Too simple: “These funds yield over 5%, not bad in this environment, and the bonds they hold are guaranteed by the full faith and credit of Uncle Sam. What’s to worry about?”
Plenty…
Aren’t Treasury Funds Free of Risk?
Unlike individuals, corporations, and municipalities, the federal government can simply create money to meet any obligations. U.S. Treasuries are thus free of credit risk. But they aren’t free of interest-rate risk.
When interest rates go up, Treasury bond prices go down. Yet investors are comforting themselves that inflation isn’t currently a problem and that long-term rates remain near historic lows.
Don’t be fooled. There is a monster on the horizon – and he makes Beowulf’s Grindel look like Barney.
- Over the past 18 months, the federal debt has surged from $5.5 trillion to more than $8.6 trillion.
- Two years ago, it was 38% of GDP. Today, it’s 59% of GDP. And by the Congressional Budget Office’s own estimates, it’s going much higher still.
This is dangerous. Yet inflation has remained remarkably subdued so far. But understand that if the government opts to stimulate the economy further – especially if some emergency action is needed – short-term rates are already at zero.
Having already thrown the kitchen sink at the slowdown from a monetary standpoint, the federal government will almost certainly opt to spend even more dramatically.
The bond markets will not take this news well. Long-term rates are likely to spike. And when they do, it will get real ugly, real quick.
Investors always think they have time to move out of longer obligations before that happens. But that is not likely to be true…
The Triple Threat to Treasury Funds
Between early October 1979 and late February 1980, for example, the yield on the 10-year note rose almost four percentage points, driving a stake through most people’s bond portfolios.
Making matters worse, millions of Mom-and-Pop investors have unwittingly plunged into leveraged bond funds in recent years, often on their brokers’ recommendation.
Leveraged bond funds borrow money in the short-term to buy more longer-dated issues and enhance the funds’ yields. This is all well and good when rates are flat to lower. But when rates spike higher, look out below. The same thing will happen to these funds as to a margined stock portfolio in a correction. |
In fact, leveraged closed-end bond fund investors could get hit with a triple-whammy…
- The bonds in the fund will drop when interest rates rise.
- The drop will be compounded by the fact that the portfolio is leveraged.
- The fund could plunge to a deep discount to its net asset value, too.
Become a Bomb Disposal Expert… On Your Portfolio
Not pretty. So what to do?
- First, check to see what percentage of your portfolio is in long-term bonds. It shouldn’t be more than 10% as a maximum (as protection against a deflationary scenario).
- Second, visit www.etfconnect.com and type in the symbols for your fixed-income ETFs or closed-end funds.
Then look at the number beside the fund’s “effective leverage.” Zero means the fund is unleveraged. But some may be leveraged up to 40% or more. (That’s how these funds are able to yield more than the bonds they invest in, even after expenses.)
In sum, this is a time to pare back your long-term bond holdings and eliminate most of your leveraged holdings.
Don’t take these words lightly. There is danger on the horizon. But if you act now, there’s still time to get that ticking time bomb out of your portfolio.
Good investing,
Alexander Green
26
Timing the Market: If Only You Knew What Mark Hulbert Knows…
0 Comments | Posted by Alexander Green in Alexander Green
Timing the Market: If Only You Knew What Mark Hulbert Knows…
by Alexander Green, Chief Investment Strategist
Monday, April 26, 2010: Issue #1246
For over a decade, I’ve been telling readers that timing the market isn’t just unhelpful… it actually hurts performance.
Now the evidence is even more definitive…
Sure, it’s easy to look back and see exactly when you could have been in or out of the market for maximum performance. That’s the beauty of hindsight.
But when you look ahead, things get a whole lot cloudier. So if you’re even thinking about jumping in or out based on some guru’s system or “market outlook,” listen up…
Trying to Time the Market? Don’t Do It!
The Journal of Financial Economics, an academic journal, recently published a new study – “Measuring Investor Sentiment With Mutual Fund Flows.”
Using easily available public information published by the Investment Company Institute, a mutual fund trade organization, the researchers focused on investor exchanges out of stock funds into bond funds and vice-versa.
This led to an interesting discovery…
- The research shows that market timers, as a group, have god-awful instincts. In fact, you could hardly find a better investment system than to do EXACTLY THE OPPOSITE of what they’re doing.
- The researchers built a hypothetical portfolio going all the way back to 1984 and switched back-and-forth between the S&P 500 and 90-day T-bills. They did the mirror opposite of what mutual fund flow figures showed switchers were doing.
- Over the next 25 years, the portfolio produced an annual return of 12% – 1.6% a year better than merely buying and holding the S&P 500.
To put this in concrete terms, buy-and-holders turned a $10,000 initial investment (with dividends reinvested) into $118,639 over the period.
Those who did the opposite of mutual fund timers, however, turned the same $10,000 into more than $170,000. (Most fund switchers, on the other hand, did about as well as someone betting on black or red at the roulette wheel.)
That’s not the best part, however…
An Impressive Performance… For Serious Contrarians Only
What makes these numbers even more impressive is that the contrarian portfolio took on far less risk than being fully invested in stocks. After all, it was invested in riskless T-bills nearly half the time.
I’m not actually recommending that you follow this strategy, incidentally. For one thing, past performance – as every investment prospectus reminds you – does not guarantee future results.
Plus, 25 years as a portfolio manager and investment writer have proved to me that the overwhelming majority of investors lack the emotional discipline to invest contrary to the crowd. (So when the chips are down, you may still be out.)
As Mark Hulbert, editor of the independent Hulbert Financial Digest, concludes, the average investor “would be far better off if he never engaged in market timing.”
The Oxford Club doesn’t. And it shows in our results…
A Top Five Ranking for 10 Years Running
Of course, every newsletter editor brags that his investment letter gives superior returns. The industry bears an uncanny resemblance to Lake Wobegone, where “all the women are strong, all the men are good-looking and all the children are above average.”
It’s worth noting, however, that Hulbert ranks The Oxford Club Communiqué among the top five letters in the nation for risk-adjusted performance over the past 10 years.
That allows us to give entirely honest answers to the two most commonly asked questions:
- “How has your investment advice worked out?” – Beautifully.
- “What do you think the market will do next?” – We haven’t the foggiest notion.
Good investing,
Alexander Green
Editor’s Note: Are you trying to time the stock market? Don’t! There’s a better way to tackle the investing process: let some of the best, most successful analysts in the business do the work for you.
The Oxford Club’s pragmatic, “market neutral” approach has generated consistent, impressive results for many years, based on real facts, information and numbers that matter, not arbitrary stock market indicators or timing.
For more details on how you can profit from the stocks in The Oxford Club’s Communiqué portfolio, please visit this link. You’ll see why the Hulbert Financial Digest has ranked the Communiqué in the top five investment newsletters over the past 10 years and get the latest investing ideas, insights and recommendations that can make you money for the next year and beyond.
