Buried in this editorial from Bloomberg is a very good question. The Fed has been buying bonds in enormous, unprecedented quantity for the last decade. Shouldn’t any reasonably intelligent primate have recognized that couldn’t go on forever and have formulated a plan for addressing any adverse consequences when the Fed ended quantitative easing?
My wife and I have constructed our entire portfolio around this. But I’ve been in the investment business for 25 years; she was director of research, many moons ago, for a significant money management company. She still trades her 401k in the same investment style. These primates know.
But really, most people?
Do a poll right here. Assume every commenter here, and you, have a $5MM net worth to construct a portfolio. Assume $500K is equity in their home. Assume its 3 years ago. Each can factor in their age and earnings potential. What should they have done?
Now let’s talk about reasonably intelligent primates. Then we can move on to retirees, Joe the Plumber……….
I assumed right off that Dave was referring to the primates at The Fed, AND that HE was assuming their best intent all these years being the public good.
I know NOTHING about it, but I won’t let that stop me this time either.
If you want, (need) to sell a lot of low yield bonds over many years, seems to me you’ve got to keep interest rates low, so the money doesn’t chase the other direction. But low rates discourage savings, encourage debt and spending,(moral hazard). See, you monkey with one thing….
As to the members of the Fed, their retirements are secure, mission accomplished!
As to how it all falls apart, ask Soros, he lives for that stuff.
$5 million? Considering we are already semi-retired on a fraction of that we’d put the emphasis on preserving the principal.
Same here (mostly unemployable/retired) would have stuck it in an index fund while waiting for house to sell so could move somewhere 100k could get some acreage and living quarters.
Andy
The $5mm was just a number for talking purposes. Pick $100 if you like. Its a portfolio allocation issue.
The implicit questions are how you achieve return while preserving principal. And just what are those risks. And for what period of time can you accept that volatility. (In finance-speak, volatility is risk.)
Drew,
For us the size of the portfolio would have a material impact on the allocation.
Currently our allocation is probably a bit different than most because my wife gets a military pension and I will get a small one as well in 9 years (since I retired as a reservist). So we don’t have to hedge as much against a downturn or loss of principle.
So right now the bulk of our retirement/long-term money is in low-cost growth-oriented mutual funds. Probably about half is the federal government’s 401k (TSP). I have small portion of my money in individual stocks that I used to use as play around with the market money, but has been pretty static for a while as I lost interest. It’s done really well mainly because I bought Apple about a decade ago.
We also have money that’s mainly for emergencies in a savings account. We’d probably put that into a CD if the rates weren’t so crappy.
And, of course, if there was any kind of decent return outside of stocks we would probably be there, which I realize is the point.
“For us the size of the portfolio would have a material impact on the allocation.”
Yes it would, which is why I originally posited a larger portfolio size number. You also differ from many in that you will have a material “guaranteed” income stream. That’s a good thing.
This is what I was getting at with respect to recent events in securities markets: (And Ill bet few, even if reasonably intelligent, primates understand, much less have done, this)
1). Dave made reference to to the extended period of (artificially) low interest rates. Whether by change in Fed balance sheet policy or a velocity induced pick up in inflation rates were bound to increase. It has been obvious for awhile now. The fixed income portion of the portfolio therefore should have been populated with low duration and/or hold to maturity issues to minimize the rate risk.
2) The equity/fixed income mix is a matter of personal risk tolerance and preferences. But as a general proposition it should have been faded downward due to outsized valuations. I, for example, don’t have to make the portfolio work as hard so I can risk down. In fact, the strategy is that equities are there simply to participate in long term appreciation but need not even be touched (for cash use yield or sell fax income) for a period of 10 – 15 years. There have been periods where equities were dormant for long periods, but 10 -15 years is a pretty fair cushion.
3). The mix of equities was drifted towards non-US just recently on valuation considerations.
All the rest is the usual stuff – broad diversification, superior credit quality (minimize high yield), control investments (private equity) yada yada yada… And we’ve pared down our RE. RE is a pain in the….
Oh. No gold. No bitcoin. No oil well MLPs…..etc That’s speculation and it doesn’t really address the Fed policy environment.
I doubt a lot of people are sitting at the kitchen table doing spreadsheets with these things in mind. It probably goes no further than what the equity bond fund mix should be.
By the way, I’m jealous. SW Florida is fine. But I’d take AZ 8 days a week.