Tips on rebalancing your retirement portfolio

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Many investors are in for a rude awakening when they open their year-end retirement plan statements. The bond portion will probably show negative returns. It could even wipeout a good portion of their positive returns from owning equities.

Now, the most common method used in rebalancing your established asset allocation mix would be to reduce the holdings that are up in value (sell stocks) and buy assets that have fallen in price (buy bonds). This practice may have worked very well in the past but interest rates are going up forcing bond prices down.

The chart below compares the S&P 500 with the IShares 20 plus year Treasury bond ETF

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“The decades-long bull market in U.S. Treasuries has finally drawn to a close following Donald Trump’s surprise presidential election victory, according to mutual-fund manager Bill Miller.”

“Miller isn’t the first to call time on the bond bull market. Economist Henry Kaufman, the original “Dr. Doom” who is credited with calling the last bond bear market in the 1970s, told the Financial Times this week that the current bull run is at an end.”

In the past, when the Federal Reserve decided it was time to unwind its easy monetary policies, it would raise the federal funds rate fairly quickly. The Fed believes a neutral stance on monetary policy is reached somewhere above the 4% level. The current Federal Reserve is moving slower than normal. Based on an average of three rate hikes per year, it will take the Fed a little over 4 years to normalize interest rates.

Tip # 1

Short-term, reduce or eliminate investing in target date mutual funds since they automatically rebalance from equities to bonds. Plus they increase your bond exposure the closer you are to retirement.

Tip # 2

During a period of rising interest rates, the prudent strategy is to reduce the duration of your bond portfolio. That could mean using a short-term bond ETF or a ladder of GICs both of which would allow you to benefit from an increase in rates.

Tip # 3

If you’re comfortable with a little credit risk, use short-term investment-grade corporate bonds to get a little more yield.

Tip # 4

Cash is by far the safest asset class. Move some of your equity allocation and some of your fixed income allocation to cash. I have my doubts that President Elect Trump can get congress to pass all his stimulus agenda and even economists are unsure if these policies will actual increase economic growth.

Corrections in the bond market are not as uncommon as you think. Most have been short in duration. See the chart below:

lt-treas-losses

Keep in mind that in the past, rate hikes were implemented  at a much faster pace than what the current Fed has purposed. Losses in the bond market could continue for longer than expected.

The Trump Rally: Buy on rumor, Sell on news?

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Never in a million years did I think that Trump would not only win the election but that the stock market would rally afterwards. It proves once again how difficult it is to time the stock market.

Trump’s promise of a big stimulus package, tax cuts and less regulation has boosted the dollar and triggered a selloff in the bond market. The “Trump trade” has become the reflation trade with investors buying cyclical stocks and selling bonds. Financials have benefited as well as industrials.

The markets have rallied assuming that Donald Trump is pro-growth. However, he was also the same guy who talked about tariffs and tearing up trade deals, things that are anti-growth. The stock market is currently ignoring the negative side of Trump’s campaign promises.

Now, I’m not convinced it’s a one-way street. Under the surface, the trend has certainly changed. Whatever you thought about stocks before the election, you have to like them a little more and whatever you thought about bonds, you have to like them a little less.

Could this be the start of the “Great Rotation’” out of bonds into stocks?

Almost $2 trillion has been wiped off the value of global bonds since Trump was elected as the next U.S. president, sparking a reassessment of growth and inflation views.

JP Morgan notes that over the past week, a record inflow into U.S. equity exchange traded funds (ETFs) was accompanied by a record outflow from bond ETFs.

Within equity markets,  a sharp rotation out of so-called “bond proxies”, dividend-paying sectors such as utilities, telecoms and healthcare which were favored by investors for their yield and a move into more cyclical sectors such as banks, industrials and some commodities-related sectors is already underway.

Before you jump on the bandwagon, there’s a flood of economic data in the week ahead

  1. update to third-quarter GDP on Tuesday
  2. OPEC meets on Wednesday and it will decide whether to curb output
  3. Thursday is ISM manufacturing data and November auto sales
  4. jobs report on Friday expected to show 175,000 nonfarm payrolls

Now, the bond market has already priced in expectations that the Fed is on track to raise interest rates Dec. 14 by a quarter point. Next week’s economic data will be evaluated to determine future rate hikes for 2017. If inflation expectations are overhauled than so are perceptions about the rate outlook. Money markets are starting to price in one or more Federal Reserve rate hikes for next year.

Good economic numbers could cause a further selloff in the bond market next week which would be positive for U.S. stock markets. Plus many active fund managers have underperformed their benchmarks, there could be some performance chasing until year end.

Unfortunately, President Elect Trump is unpredictable and somewhat scary. If he shuts the borders because the anti-trade Trump comes out, we’ll have a recession and the market will go down. If that side stays quiet and he manages to convince congress to cuts taxes, it could be up a lot.

My gut tells me that we could be in over bought territory and that we could see some market consolidation. My fear is that Janet Yellen could spark a stock market selloff like she did in December 2015 when she indicated the possibility of 4 rate hikes for 2016 which didn’t materialize.

Are you buying into the Trump rally or are you a seller?

 

 

 

Trump economics could be hazardous to bonds and dividend stocks

Trump’s stunning victory for the White House may mark the long-awaited end to the more than 30-year-old Bull Run in bonds, as bets on faster U.S. growth and inflation led investors to favor stocks over bonds.

There has been a sentiment shift in the bond market. The stampede from bonds propelled longer-dated U.S. yields to their highest levels since January with the 30-year yield posting its biggest weekly increase since January 2009. The 10-year German Bund yield rose to its highest level in eight months, while the 10-year British gilt yield climbed to its highest level prior to Britain’s decision to leave the European Union on June 23, known as Brexit.

“I’m the king of debt. I’m great with debt. Nobody knows debt better than me,” Trump told Norah O’Donnell in an interview that aired on “CBS” “I’ve made a fortune by using debt, and if things don’t work out I renegotiate the debt. I mean, that’s a smart thing, not a stupid thing.”

Global bond markets worldwide have already lost more than 1 trillion dollars.  Speculation is that Trump’s tax cuts and stimulus spending could increase the national debt by trillions of dollars. The chart below is the iShares 7-10 Year Treasury Bond (IEF)

bonds-10-7

 

TIPS appeal

While investors dumped most types of bonds after Trump’s victory, they piled into Treasury Inflation-Protected Securities as a hedge against a pick-up in inflation. Investors poured $1 billion into TIPS in the week ended Nov. 9, the second-biggest inflows since records began in October 2002, data from Thomson Reuters’ Lipper service showed on Thursday.

Higher bond yields could have a negative effect on dividend stocks

Bonds have historically enjoyed a lower risk premium than dividend stocks. Higher bond yields could attract investors away from owning dividend stocks. Consumer staples and utility stocks have already fallen based on the Fed raising interest rates in December. Some experts believe that the Federal Reserve will be forced to increase rates even more in 2017.

The good news is that this could be just a knee jerk reaction to the shocking election results. In a subtle effort to lessen fears, President Obama suggested Monday that the office of the president has a way of opening one’s eyes to the realities of governing and decision making.

“Regardless of what experience or assumptions he brought to the office, this office has a way of waking you up,” Obama said.

“My advice, as I said to the President-elect, was that campaigning is different from governing,” Obama said Monday. I think he recognizes that I think he’s sincere in wanting to be a successful president. I think he’s going to try as best he can to make sure that he delivers not only for people who voted for him but the people at large.”

It remains unclear how Trump’s promises translate into policy and the degree to which they would affect the economy. So far, the rally in U.S. stock markets suggest whatever Trump may do with the help of a Republican-controlled Congress would give a lift to the U.S. economy, which is growing at about 2 percent this year.

cautionHigher interest rates could cause a U.S. recession!

Is another credit bubble forming in subprime car loans?

I went shopping for a new car last week and was offered a subprime loan rate that sounded too good to be true. Without even checking my credit history, I was offered the choice of nothing down & half of one percent financing for 5 years. If I wanted to pay cash for the $30,000 vehicle, the dealership would reduce the price by 2,500 dollars.

The credit manager took some time to explain how subprime loans work. Auto makers take their cash back amount and give it to the finance company to buy down the interest rate. So in my case, I could take the $2,500 cash back or it would go to the finance company to reduce my loan interest. My choice really didn’t affect the car dealer in any way.

It got me thinking about some of the articles that I read sounding the alarm bells on the rising delinquency rates in subprime auto loans. Much of the concern centers around loans extended to borrowers with credit scores below 600. Some articles warn that the auto-loan market is a powder keg like the subprime mortgage market was when the globe plunged into a financial crisis eight years ago.  Will the bursting of this bubble cause another U.S. recession?

John Oliver, host of the HBO show “Last Week Tonight,” takes on the opaque world of auto lending.

Oliver points out that while helping people buy a car sounds great, lenders are taking advantage of borrowers with some predatory strategies and absurdly high interest rates. Some are offering loans to those who have recently filed for bankruptcy. Poor borrowers charged high interest rates–the average rate is 19%– end up under a pile of debt. One clip showed that a woman would have to spend $17,000 paying back a loan for a car worth $3,000.

Auto loans, including the loans extended to prime and subprime borrowers, topped $1 trillion for the first time last year, according to Experian data, exceeding the outstanding balances on U.S. credit cards. But that is a far cry compared to the $8.4 trillion mortgage market. Plus, it’s easier to repossess a car than foreclose on a home. There is typically a healthy marketplace for used and repossessed cars. Trying to unload a $300,000 home is far more difficult especially in a neighborhood of foreclosed properties.

As an investor, be aware that massive defaults on auto loans could flood the used-car market, depressing prices for all car types should the bargains among used-vehicle options sway buyers away from new cars. Both Ford & GM are trading with low P/E’s (5.8 & 3.9) and have dividend yields in the 4.7% range. The yield is very attractive for investors looking for income as long as you understand that there could more downward pressure on the stock price.

In a quarterly filing with the Securities and Exchange Commission, Ford reported in the first half of this year it allowed $449 million for credit losses, a 34% increase from the first half of 2015. General Motors reported in a similar filing that it set aside $864 million for credit losses in that same period of 2016, up 14% from a year earlier.

If you are in the market for a new or used car, make sure that you can afford the payments. Don’t fall for, no money down ads, 100% approval rates and no sin number required. Remember a car starts to depreciate as soon as you drive it off the lot. Extending a car loan to 84 months (7 years) keeps your monthly payments low but the outstanding loan could be greater than the value of the actual car.

Will that be Debit or Credit?

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Most financial writers would recommend purchasing items using a bank debit card or cash instead of a credit card to control impulse buying. A debit card transaction will allow the vendor to take money right out of your bank account. It is so quick, you can see the transactions appear on your online bank statement minutes after your card has been swiped. This is good advice because spending money that you don’t have can lead to accumulating a lot of unnecessary debt.

However, my only problem with using a debit card or cash is security. Lose your wallet or purse and kiss the cash good-bye. If thieves get a hold of your debit card, the bank will not cover your loss. I am fortunate that the credit card companies in Canada have all adopted chip technology with a 4-diget Pin number for added security. Plus most retail stores even have a tap option for purchases under $100.00, so tap and go is quick and easy.

My decision to always use credit over debt, just saved me $1,470.67 because my wife’s credit card was recently compromised. The thief was very smart, only one big transaction which the credit card company didn’t red flag as an unusual purchase. I always check my monthly statements and recognized the bogus charge immediately. This is the third time in less than ten years that I have had to get a new credit card due to fraud.

The previous two times, the credit card company called me after they noticed some unusual activity. Although, it was a little embarrassing to have my credit card purchase declined but it is better than losing money. My experience with credit card fraud has made me into a frantic when it comes to making sure that I don’t lose any credit card receipts. I always cross-reference the receipt with my monthly statement. We even record each on-line purchase on a separate piece of paper and file it with the rest of our receipts.

Thieves have become very bold! I received a phone call at 6:00 a.m. from someone pretending to be from my credit card company. He stated that my credit card may have been compromised and requested that I should turn on my computer to check my debit card transactions. He wanted to get access to my banking information. Warning bells went off in my sleepy head. What the thief didn’t know was that credit card and debit card were with two different banks.

Protect yourself from fraud

  • Use a credit card for all your on-line purchases for added protection
  • Keep your receipts and check your monthly credit card statements
  • Hang up on questionable phone calls and call your financial institution
  • Use a pin number that doesn’t have any personal dates, like your birthday
  • Change your pin number from time to time
  • Share with family and friends information on current scams in your area

What is your answer to the question? Will that be debit or credit?

 

2nd Anniversary of Smart Money: Lucky number 2

In sports, no one cares who came in second. The number 2 rating of a stock is a buy. There are two sides in investing, you can be either bullish or bearish.  Number 2 in Chinese Culture is an auspicious number because Chinese people believe that good things come in pairs.

“The symbolic meaning of number Two is kindness, balance, tact, equalization, and duality. The number Two reflects a quiet power of judgment, and the need for planning. Two beckons us to choose. The spiritual meaning of number Two also deals with exchanges made with others, partnerships (both in harmony and rivalry), and communication.

2 number

What is the 2nd best investment that you can make?  The number two  investment really depends upon your age, where you live, your risk tolerance, your income level, your time horizon and your family situation. The number two investment choice for someone in their 20’s could be paying down debt. For someone in their 30’s, it could be buying a house.  For a high income earner, it could be maximizing their contributions into their retirement account. For someone who lost their job, it could be starting a small business.

So what is number one?  My answer is YOURSELF because our education system gets a failing grade regarding financial literacy. All these choices requires some financial knowledge and some basic math skills in order to be successful. I was shocked at the results of a recent financial literacy test.

Would You Pass the Global Financial Literacy Test?

Question 1: Suppose you need to borrow 100 U.S. dollars. Which is the lower amount to pay back: 105 U.S. dollars or 100 U.S. dollars plus three percent

Question 2: Suppose over the next 10 years the prices of the things you buy double. If your income also doubles, will you be able to buy less than you can buy today, the same as you can buy today, or more than you can buy today

Question 3: Suppose you have some money. Is it safer to put your money into one business or investment, or to put your money into multiple businesses or investments?

Question 4: Suppose you put money in the bank for two years and the bank agrees to add 15 percent per year to your account. Will the bank add more money to your account the second year than it did the first year, or will it add the same amount of money both years?

Question 5: Suppose you had 100 U.S. dollars in a savings account and the bank adds 10 percent per year to the account. How much money would you have in the account after five years if you did not remove any money from the account? (a) $150 (b) more than $150 (c) less than $150

 

literacy

Highlights of the survey:

  • The U.S. lags behind other major English-speaking economies in its percentage of financially literate citizens. Citizens of Canada and the United Kingdom beat the U.S.
  • Only 35 percent of respondents around the world got the right answer to Question 3.
  • Many homeowners can’t calculate the basic interest owed on their loan payments. About a third of adults in the U.S. have an outstanding housing loan; three in 10 don’t understand how their debt accumulates.

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Answers to the literacy test

  1. 100 U.S. dollars plus three percent
  2. the same
  3. put your money into multiple businesses or investments
  4. more money in the second year
  5. (b) more than $150

Some may argue that personal financial literacy isn’t the number one investment because you can always pay a professional. I would agree if you are lucky enough to select a good one. In twenty years of running a small business, I changed accountants three times. I changed stock brokers countless times until I became a do it yourself investor. I have dealings with three different banks to meet all my financial needs. Plus selecting the right professional still takes some financial knowledge, the ability to understand the advice and act on it.

In reality, the first and best investment that you should make is in educating yourself. Did you get take the financial literacy test and did you answer all five correctly?