Wednesday, December 12, 2012

Where Do You Get Yield?

Yesterday I went to the IndexUniverse ETF conference in NYC for an all day meeting on ETFs.  This further convinced me that ETFs and more specifically, tactically managed ETF portfolios are the wave of the future.  There were a lot of great speakers and I came back with some good ideas but one issue that was on the mind of the presenters and the audience was where to get yield in this environment.  The consensus was that the bond market will eventually implode (something I always like to remind people who have only experienced a bull market in bonds during their investing lives) but it won't happen tomorrow.  But there was no good answer on where to get yield with 10 year Treasuries under 1.75%-that is of course because you are not getting paid for the risk you would have to take in any bond market. 

On the surface this seems like a good question and a valid concern but it really isn't.  There are three potential sources of return when you invest---dividends, interest, and capital gains.  If we ignore for a moment the tax implications of each (partly because we don't know what they are going to be) it doesn't really matter where return comes from as long as it comes.  Focusing entirely on yield---dividends and interest, in a low yield environment, forces investors to take way too much risk.  A tactical approach is a much better idea as there are times to focus on yield and times to focus on capital gains.  In an environment where the Fed is manipulating interest rates to keep them low for the foreseeable future then capital gains is really the only game in town when it comes to generating returns. 

Unfortunately, it is not as simple as just buying stocks and holding them.  Everyone is predicting low stock returns out into the future.  Ignore for a moment the fact that Wall Street has a poor track record of predicting anything and assume that this is true.  Does that mean that stocks just won't move?  No, it means we will have some up years and some down years and net/net we will end up pretty close to where we started.  For a buy and hold investor that is a disaster.  For a tactical investor who can stay in harmony with market trends it creates a ton of opportunity to generate returns. 

What if on the other hand we are on the verge of a great bull market (which, after we get through this deleveraging period I think is highly likely)?  Then both tactical and buy and hold will generate capital gains, tactical will just do it with less risk. 

So the question should never be---where do I get yield?  The right question is always---where do I get total return?

Friday, December 7, 2012

Danger Lurks Inside the Bond Boom

Interesting article in the Wall Street Journal about corporate bonds and how many corporations now have higher dividends on their stocks than yield on their bonds.  It also talks about how many bond managers are moving into equities or equity like investments.  This is another consequence of the Fed's QE policy which forces many investors into stocks but could have a number of dangerous consequences down the road when interest rates increase and if stocks take a tumble.

Monday, December 3, 2012

Scrounging for Income

Scrounging for Income

Another article this morning about one of the hottest topics in investing these days---where to find income.  Just like all things that generate "sales sizzle" for Wall Street to push on individual investors, this topic is filled with danger.  Investors need to remember a couple of key points:

1. Total return comes from three sources---interest, dividends, and capital gains.  Tax wise there may be differences in the source (depending on what deal Congress reaches) but at the end of the day all money is green no matter where it comes from.  Focusing on only one area, like dividends or interest, can lead to disaster. 

2. Wall Street is pretty good at paying people for taking risk.  If investors just focus on dividends and/or interest, typically the investments that have the highest payouts are the riskiest.  You can find 6,7,8%+ yields these days, but at the risk of losing 30% or more of your money.  From a risk/reward standpoint that doesn't make sense.

3. Bonds have had a massive bull run over the past few years.  For that to continue, interest rates need to go down, which is unlikely as short term rates are already pretty much at zero.  If interest rates eventually rise, bonds will go down in value.

If investors insist on pursuing income, the best approach is to be tactical.  Should they buy high yield bonds, emerging market bonds, closed end funds, dividend stocks?  Sometimes yes, sometimes no.  A true tactical approach can shift to whatever area(s) are in an uptrend and avoid large losses when another area enters a downtrend.