Down goes the Dow

Seattle,

Run a six month chart of the XLU (SPR Utilities) against the TLT (iShares 10-20 Treasury) and you will visually see my point,

Igy

makes sense. My mother's portfolio was loaded with crap like that. But i could see moving to safer, more stable stocks, like Berkshire H. or similar.

As for the electric utility company with poor performance, i got sold on nat. gas/pipeline MLPs a few years back for the high dividends, and it was fine for a while, but they got killed along with the rest of the energy sector as a whole. Just decimated.

Seattle,

Seven years ago I went to a conference that was highlighting the development and investment thesis of MLPs. It was great for raising money for the fracking companies. But the fundamentals were highly correlated to both energy and the bond market. The sales pitch was the investment should be views as a “toll road” were oil and gas flowed and was less influenced by the price of the commodity. I never bought into the hype.

Berkshire has benefitted from the perception as a store of value and safety. That is a consensus view, and one that is likely overstated. Furthermore, Berkshire has strayed a bit from their value slant in recent years, and my assumption is that Buffett is more of a front man and less involved in day to day activities.

A fact you can surely rely on is that in a severe downturn all stocks have a correlation of one. Investors seek safety in cash, liquidity. So the only true portfolio protection comes from hedges and decreased allocation to equities.

Igy

Another move to a safer strategy is with Prefered Stock ETFs, like PGX, that tracks the BofA Merrill Lynch Core Plus Fixed Rate Preferred Securities Index. It is subject to interest rate moves somewhat, but still has some movement with the market rises/falls and pays a solid, stable dividend.

PGX has an effective duration of 5.87, which means for every 1% move in interest rates the fund will lose approximately 5% in principal. The fund is also 72% financial stocks with the average maturity of the fixed income of 38 years. This is a long dated bond fund, highly correlated to interest rates and the financial sector. The fund is 50% below is pre-financial crisis level.

https://www.invesco.com/portal/site/us/investors/etfs/product-detail?productId=pgx

Unfortunately not optimal in this environment. In my view one must balance the risk of principal loss versus income.

i don't see how it's 50% below its pre-financial crisis level.

If it drops much lower, i'd sell it, still leaving with a substantial gain, and years of dividends already collected.

Since you mention it, i checked and see that I bought at exactly the current price, so good thing the topic came up.

Will not take a loss on it so may sell shortly.

Thx.

Ghost of Igloi wrote:

Financial Advisor wrote:

That type of thinking is slowly being turned on its head. The reality is that someone retiring at 65 may have the need for 20+ years of investment survivability. Thus modern thinking is that stock allocations should remain higher than the traditional 40% at retirement.

You should test that assumption against facts. Research sequence of return and you will learn to be a better FA.

I’m quite familiar with sequence of return. You seem to think there is only one approach. The reality is that there are several.

Of course, every situation is different. Unlike those of you who prefer the reduced volatility approach, on average I’m not so quick to recommend much of a reduction in equity exposure for a 65 year old retiree. To me, that puts the retiree in a very dangerous place if one assumes they will live at least another 20 years. Cash is not king in such a situation. I prefer to maintain equity exposure for several years with an asset buffer.

Seattle,

Just know how sensitive PGX is to interest rates and the slant to financials. If you are comfortable with that and not more than about a 5% portfolio position you are fine. I don’t have a particular view about interest rates over the short run, but the all-time low in the 10 Year Treasury was about 1.37% in July 2016, and I believe we closed in the 2.65% range Friday. A year ago a one year CD was about 0.80% and 1.90% today. So on a percentage basis huge upward moves.

Igy

FA,

Explain what you mean by an asset buffer.

Igy

No, i get that. With interest rates likely to go up and the chance to break even at this point, i don't want to be caught holding it waiting for a break even point that could take years.

I never really liked the feeling that of the 5.85 % yield, a portion of that goes to paying taxes on the dividend and then there's something like over a half percent in net operating costs each year. Not a lot to fall in love with there.

Thx.

Ghost of Igloi wrote:

FA,

Explain what you mean by an asset buffer.

Igy

Basically it’s the cash part of the bucket strategy.

FA,

OK.

What happens if your equity bucket is cut in half and does not recover for seven years?

Igy

That’s bucket #3. The system is set up for that possibility. Just leave it alone until it recovers.

Financial Advisor wrote:

That’s bucket #3. The system is set up for that possibility. Just leave it alone until it recovers.

And for that matter, buy quite a bit while it's down. Been there, done that.

FA,

What happens if the bond bucket loses principal in a rising interest rate evironment and you don’t have enough cash and income to support your distribution rate, thus seriously reducing portfolio assets?

Igy

Then you go to the equity bucket.

FA,

This article explains the mirage of your thinking. Nice theory though, but a gamble with stocks and bonds at record high valuations. My opinion of course, and not alone I might add.

http://www.thinkadvisor.com/2007/06/01/lesson-5-spending-buckets-and-financial-placebos

Igy

Another article: http://www.owrsfirm.com/wp-content/uploads/Milvesky-Sequecing-of-Returns.pdf

Before reading that article, I’d never heard of a retirement strategy with only two buckets. Every example I’ve encountered has always used at least three buckets and this article supports that idea.

And what responsible advisor would ever suggest a retiree withdraw 9% per annum?

Igy, maybe now you can offer your strategy for an average 65 year old retiree?