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The 60/40 Portfolio is Dead – How to Replace It

Bonds and stocks have only interacted negatively in the past 20 years. Their average correlation throughout the previous 65 years was positive. When this correlation isn’t negative, the 60/40 portfolio is weak in protecting your investment.

We all had believed, for a long time, that the ideal is a 60/40 portfolio, which consists of 60% in equities and 40% in bonds. That excellent combination provided greater exposure to stock returns. At the same time, this mix gave a good possibility of diversification and lower risk of fixed-income investments.

But the world is turning around and markets are changing too.

Experts recently noticed that this 60/40 portfolio isn’t good enough. Portfolio strategists claim that the role of bonds in our portfolios should be examined. They argue we need to allocate a bigger part toward equities.

Strategists report

Bank of America Securities (a.k.a. Merrill Lynch) published research last year named “The End of 60/40”. The strategists Jared Woodard and Derek Harris wrote:

“The relationship between asset classes has changed so much that many investors now buy equities not for future growth but for current income, and buy bonds to participate in price rallies.”

That note by Merrill Lynch caused great turbulence among investors. The point is that your conventional sense of investing 60% of your portfolio in stocks and 40% in bonds is no longer so smart.
Merrill Lynch strategists explained that there are grounds as to why the 60/40 portfolio will not outperform portfolios with more stocks versus bonds in it. Therefore, investors have to allocate a bigger percentage of equities to their portfolios instead of bonds.
This is the opposite scale compared to what investors used for many years. They were investing in equities for price rallies and buying bonds for current income.

How did the 60/40 portfolio die?

For the last 20 years, the golden rule was a portfolio of 60% stock and a 40% bond. Everything was good with that: investors had the bonds in portfolios, a 60/40 portfolio provided them the upside of equities, their investments were protected from downturns. But they gave evidence to investors as to why this ratio should be changed and why they have to add more equities than bonds.

Here are some. Data is for the markets globally. During the last year, $339 billion were in inflows to bond funds but almost $208 billion were in outflows from equity funds. So, we now have a tricky situation. Bond yields had fallen. The consequence is that we have about 1.100 global stocks that pay dividends higher than the average yield of global government bonds.

The global economy slows

We must have in mind that the global economy lags due to the aging society and there were rallies in bonds almost all over the world. It was like a bubble. Hence, the investors who manage a traditional 60/40 portfolio are in a situation that threatens to hinder returns.

“The challenge for investors today is that both of those benefits from bonds, diversification and risk reduction, seem to be weakening, and this is happening at a time when positioning in many fixed-income sectors is incredibly crowded, making bonds more vulnerable to sharp, sudden selloffs when active managers rebalance,” said strategists from Merrill Lynch.

The 60/40 portfolio canceled

The popular rule of thumb: investment portfolios 60% in stocks and 40% in bonds, is smashed. The finance industry did it. Moreover, financial advisors urging investors to hold riskier options since, as they claimed, bonds no longer offer diversification. Hence, bonds will be more volatile over the long run. Further, the 60/40 portfolio has sense in the market conditions when stocks and bonds are negatively correlated. The stock price falls – bonds returns rise both serving as a great hedge, bonds against falling stock prices, and stocks as a hedge against inflation. According to strategists, no more.

This will completely change the portfolio management.

The benefits from bonds, diversification and risk limitation, seem to be missing. The bonds are more vulnerable to unexpected selloffs. The mentioned rule of thumb was accurate for 20 years but not for the past 65. Also, it is noticed that this period of negative correlation between bonds and stocks is coming to an end.

Also, Morgan Stanley warns that returns on a portfolio with 60% stocks and 40% bonds could drop by half in comparison to the last 20 years. Earlier, the analysts and strategists from Guggenheim Investments, The Leuthold Group, Yale University, also prognosticate distinctly lower returns.

How to replace the 60/40 portfolio?

The 60-40 portfolio is dead and it is a reality.

Be prepared, you have to replace it. Some experts suggest keeping 60% in stocks but to hold a position shorter, as a better approach.

But you have to hedge your portfolio. Experts suggest single-inverse ETFs and options for that purpose.

The others think the best way is to replace the 60/40 portfolio with some hedged equity portfolio. This actually means you should have more than 60% in stocks since the stock market is more liquid in comparison to the bond market. For this to implement, it is necessary to have tools. Also, the knowledge on how to use them. From our point of view, it seems that time to forget the 60/40 portfolio is here. All we have to do is to change the mindset and stop thinking about the mix of stocks and bonds. Instead, it looks like it is time to think about changing the net equity exposure.

Maybe it is the right time to hold more cash, which can be a tactical defense. For example, cash can be a part of your 60% holdings when you are not fully invested in stocks. Or you can hold cash in the percentage that previously was in bonds. Also, you can combine it. You MUST build a hedged portfolio to avoid the 60/40 portfolio hurricane that is likely coming.
For example, build a portfolio of, let’s say 75% stocks and 25% your hedge combination. This range can be tighter also.

Honestly, it is so hard nowadays to fit the excellence of the 60/40 portfolio.

Bottom line

The 60/40 portfolio was really good but it had a wild side too. The stock portion was down over 25 years of its 91-year existence. Over those 25 years, the average loss was above 13%. But there were bonds with a gain of above 5%, which reduced some of the losses. This portfolio was stable and reliable and you could use it for a long-time.

The other problem with the disappearance of the 60/40 portfolio is diversification. Is it dead too?

Peter L. Bernstein said, “Diversification is the only rational deployment of our ignorance.” Investors have to figure out different access if stocks and bonds no longer balance one another. This great portfolio will miss everyone. Maybe, one day, we will meet again. But some conditions have to be fulfilled. The interest rates should be 6% again, the stock market valuations shouldn’t go over 15x the previous 10 years’ worth of average earnings. That is hard to achieve now.
R.I.P. the 60/40 portfolio.

10th February 2020
The Barbell Portfolio – Strategy Of A Balance

The barbell portfolio holds only short term and long term bonds and generates fixed income. A flattening yield curve situation is the best time to use this strategy, while a steepening curve is harmful to the strategy.

The barbell portfolio was invented by bond traders. The strategy means to hold safe short-term bonds and riskier long-term bonds. Put them together and that is the barbell portfolio. This also means that you are betting on both sides. But your barbell portfolio gives you protection since you have extremely safe short-term bonds. Yes, they will provide you with less profit but the profit is compensated from the other side of your portfolio – by long-term bonds that are extremely risky but provides a great profit.

Building a barbell portfolio, you will give your investments a balance that can run you through different circumstances, even extreme ones. The barbell portfolio is a very simple investment allocation actually. But the barbell portfolio is heavily weighted on two ends, just like a barbell. This concept is easy to understand and we want to explain it by using bonds. You can create this kind of portfolio with cash and stocks, also it can be a nice substitute to a 60/40 stock/bond portfolio.

How to structure barbell portfolio

Let’s say the short-term bonds are risk-free. But you will not earn a lot by holding only them. To have a profit you must add something riskier to your portfolio. So, you can do it by holding long-term bonds. You see we are not considering mid-term bonds. There are long-term bonds to provide the yield to your portfolio.

Yes, they are the riskiest but also give the highest returns.

The idea of this kind of portfolio is to bypass and avoid the risk on one side of the barbell portfolio and to do it as much as possible but to put more risks with long-term bonds.

For every investor, the risks diversification is one of the most important parts. So how to do that with a barbell portfolio? For example, you can build it if one half of your portfolio is in bonds with 5 years maturities and the rest is in bonds with 15 years maturities. The point is to put weight on both ends of your portfolio. But it hasn’t to be equal weight. it can be turned in one direction or another. Of course, it depends on an investor’s vision and yield demands.

You have to pay attention to the bond barbell strategy. It isn’t a passive strategy. You will need to monitor short-term bonds and adjust them frequently. Also, the other end with long-term bonds should be adjusted from time to time because of their maturities shorten. Some investors will just add new bonds to replace the existing.

Barbell Investing

It is all about aiming to balance risk in your investment portfolio. For example, if you put bonds on the left end of the barbell portfolio you might be faced with rising interest rates. So, the value of the bonds could decline. In order to balance the weight, you can replace them or part of them with, for example, with dividend-paying stocks, or some other ETFs. This left side has a great role. It has to protect your wealth so the savvy investor will always choose low-volatile and low-risk assets for the left end.

The right side’s role in your barbell is to give you high profits. That is your financial goal. So you can add some aggressive stocks there instead of long-term bonds.

The barbell strategy is actually a simple investment allocation. Two ends, two sides of your portfolio are designed like opposite ends. What you have to do is to allocate your capital between safe and aggressive sides. Some experts recommend holding 80% treasury bonds and 20% stocks.

Some may ask why to diversify like this. Here is why. Let’s say you have invested 100% in different stocks. Yes, you have a diversified portfolio but you are, at the same time, 100% exposed to downside risk and you are at risk to lose all your capital invested.

But if you build a barbell portfolio with 80% bonds and 20% stocks your downside risk can arise on your risky part of the portfolio. That is 20% of stocks. But the point is that the majority of your portfolio will be in safe investments. Moreover, bonds will give you interest too.

Why use this strategy?

Because it can lower risks for investors. At the same time, it can provide exposure to higher yield bonds. Higher yields will compensate for the higher interest risk rate. So that is the first benefit. This strategy allows investors to have access to higher yield long-term bonds. The other benefit is that this strategy reduces risks because the short-term and long-term bonds’ returns favor being negatively correlated. In other words, when short-term bonds are doing well, the long-term bonds will have difficulties. When you hold bonds with different maturities it is more likely to have less deadfall risk. Let’s say when interest rates grow, the short term bonds are rolled over and reinvested. Of course, at a higher interest rate. That will compensate for the drop in the value of longer-term bonds. Opposite, when interest rates are lower, the value of the longer-term bonds will grow. Simple as that.

But remember, it’s so important to manage the weight of both ends. And to do it actively. The contrary will never produce long-term returns. If you notice that the assets on one end of your barbell portfolio somehow look expensive you have to change it and balance by leaning toward less expensive assets on the other end. Well, if the prices are expensive on both ends, you will need to reduce overall portfolio risk.

Is there any risk?

Yes, interest rate risk no matter do you hold both long term and short term bonds. If you buy the long-term bonds while the interest rates are low they may lose value quickly when the interest rates increase.

An additional risk of the barbell strategy comes from the investors’ limitation, this portfolio doesn’t include intermediate-term bonds so you will not have exposure to them. And we all know that intermediate-term bonds give better returns than short-term bonds. Yes, they are riskier but not too much. In comparison with long-term bonds, intermediate-term bonds will offer a bit lower returns. That is the downside of the barbell portfolio because you don’t have an opportunity to earn on these returns.

Well, the main risk of the barbell strategy lies in the longer-term bonds. They are more volatile than their short-term bonds. As we said, you will lose if rates rise and you choose to sell them prior to their maturity date. If you keep the bonds until the maturity date, the fluctuations will not influence negatively.

The worst scenario for the barbell is when long-term bond yields are rising faster than the yields on short-term bonds. That is the steepening yield curve. The bonds that make up the long end of the barbell drop in value. So, you may be forced to reinvest the profits of the lower end into low-yielding bonds, to balance the portfolio.

But the flattening yield curve, if yields on shorter-term bonds rise faster than the yields on longer-term bonds you will earn. That is an advantageous part of the barbell strategy.

Bottom line

The benefits of the barbell investing strategy are numerous. Firstly, you will have a better diversification of your investments. Also, you will have more potential to reach higher yields with less risk. If interest rates are falling all you have to do is to reinvest at lower rates when the maturity date of that bond comes. In case the rates are rising, you will have the chance to reinvest the profits of the shorter-term securities at a higher rate. Since the short-term bonds mature frequently, that will provide you the liquidity and adaptability to solve emergencies.

27th January 2020
Diversification Is Important to Your Investment Portfolio

When stock prices drop, bond prices increase. A portfolio that holds stocks and bonds plays better than the one that holds only stocks.

Diversification means to spread the risk across different types of investments. The main purpose of diversification is to enhance your chances of investment success. In other words, you are betting on every one.

Diversification is very important in investing because markets can be volatile and extremely unpredictable. If you diversify your portfolio, you will reduce the chance to lose more than you are prepared to.

And that is exactly what you would like in investing: to spread your capital among different assets. So you’re not relying on a single asset for all of your returns. The key advantage of diversification is that it provides you to minimize the risk of losing the capital invested.

What is diversification?

Diversification means building a portfolio of your investments in a way that the majority of the assets will have a different reaction to the same market performance. For example, when the economy is growing, stocks will outperform bonds. In opposite circumstances, bonds could play better than stocks. Hence, if you hold both stocks and bonds, you will reduce the risks in your portfolio from market swings.

Let’s make this more clear. What do you have in your pantry? Only beans? Of course not! When you went to the grocery you bought everything you need for the week or month ahead. The same should be with your investment portfolio. It should consist of various assets. But not too many. Too many assets mean you will not be able to follow their performances. If you are fresh in the stock market, maybe a two-fund portfolio is a good choice for you. More about this you can read HERE.

Think of these various types of groceries as the different areas, techniques, and areas available to you as an investor. If you have a variety of assets, you’ll be better protected. In the situation when one of your assets is hit by the risk you will still have the others that can give you a profit.

Reasons for diversification

Even the explanation is so simple you can still find so many investors that play on one card. You may ask how some really smart guys could avoid diversification and put all eggs in one basket? We couldn’t find the proper answer because the benefits are so obvious.

By diversification, investors lower the overall risk. It is logical how this works. When you spread your investments in various classes (diversifying them) you have more chances to avoid the negative influence in your portfolio. For example, let’s say you invested in stocks only and you hold a stock of just one company. Yes, we know you like it, it is a good company, famous, well-run. But if suddenly something unpleasant hit it and the stock price drops, let’s say, for 30%, how that occasion will influence your overall portfolio? You will lose 30% of your portfolio. But let’s consider the other situation. Let’s say that stock makes up a modest part of 5% in your portfolio. So, how much of your overall portfolio you will lose now? Can you see where is the benefit of diversification? It lowers the risk. Even during economic downturns, you will still have good players in your portfolio. Hence, if you have bonds and stocks added to your portfolio, it is more likely that even one of them will run well during particular circumstances. Bonds will play better when the economy is decreasing, but when the economy is growing, stocks will outperform bonds.

Diversification and investment strategy

You can find various investment strategies but two are most popular: growth and value investing.

Value investors tend to consider the strength of a company and its management. They would estimate if the company’s stock price is undervalued based on its true worth.

On the other side, growth investors would estimate how fast the company is growing, could its new products stimulate future earnings, etc.
By taking just one strategy you can miss out on the benefits of the other. But if you spread your investments on both of these strategies, it is pretty sure that you’ll be able to enjoy the benefits of each.

Influence of “home country bias”

Well, it is completely natural that investors are more attracted to their own state markets, the national industry. That’s how we come to the “home country bias” in investing. Of course, it is a natural tendency. But it can be a problem too. “Home country bias” can limit your investments to the offer from domestic markets. But what is needed for profitable and successful investing is to step out of your comfort zone. Foreign markets can be profitable also. What you have to do as an investor is to add some international fund or company to your portfolio. It is good protection and well-done diversification. Diversification across international markets will protect your investments if the domestic economy downturns (no one wants that, of course) or during the recession in your country. Several years ago we heard one of the investors saying it isn’t a patriotic gesture. Well, we have to say, investing isn’t an act of patriotism. It is all about profit.

Produces more opportunities

Eventually, diversification produces more opportunities if you make smart choices that deliver balance to your investment portfolio.

For example, you only invest in stocks. But suddenly some great opportunity occurs to invest in, for example, bonds. What will you do? Refuse to invest in bonds because you are not comfortable with them and risk to miss potential profit? We don’t think it is a smart idea. Never miss the opportunity to earn more, that isn’t in the nature of investing. Admit, you will never miss this opportunity to invest in bonds if you have a diversified portfolio. So, diversification gives you more opportunities to invest.

Protect and improve your finances

It is important to understand all the benefits of diversification. It isn’t hard to do. Actually, it is very simple. You have to read more, learn and be patient. If you diversify your investment portfolio you will have a chance to build stable finances over time.

How to diversify your portfolio

Firstly, never be too much invested. You will not be the winner if you own hundreds of assets. Okay, let’s say this way. Your portfolio is your team. And, as in every team, each part plays its role. No coach will put all players in one position. It’s stupid. Plus, how such a team will win anything? Of course, zero chances!

The point of diversifying is to hold investments that able to work separated tasks on your team.

Every single part of your portfolio should have a different role. For example, if you prefer stocks, diversify your portfolio to S&P 500 (that would provide you exposure to large-caps) and add some small-caps.

If you have a bond portfolio diversify it across short and long bonds, or higher-quality bonds, etc. That will reduce the risks. Or just add alternative investments in your portfolio. For example, private equity, hedge funds, real property, venture capital, commodities, etc.

Bottom line

How will you know you’re diversified? A well-diversified investment portfolio will never move in the same trend and at the same time. You must have one thing on your mind: you are the manager of your portfolio. Also, it is almost impossible for all investments to grow all the time. It is 100% sure that some of your positions will be lost, will lose you money. When that happens you will need the other holdings to balance that fall.

Diversification guards you against producing an undesired risk to your capital. Anyway, it is too risky to put all your money into one single investment. The key to diversification is to spread your money across asset classes and to allocate within classes. That is a smart approach.

23rd January 2020
What is Riskier Bonds or Stocks?

(Updated October 2021)

In some scenarios, bonds are riskier than stocks. The main problem is how to run your investments stable but not cutting the growth stocks have to give.

Do you think the stocks are riskier than bonds? Well, stock prices are more volatile than bonds, that’s the truth. Also, bonds are paying fixed income. What else is on the bond side? Well, not much. Maybe these two is all since bonds could be riskier than stocks. The whole truth is that bonds are very risky for the companies, but at the same time, less risky for investors. Speaking about stocks, they are less risky for the companies but for investors, they can be extremely risky.

So, why do so many people think that bonds are less risky? We have to solve this dilemma: what is riskier, bonds or stocks.

The most and least risky investments

There are so many factors that have an influence on how some investment will perform. Honestly, all investments carry some level of risk. Speaking about bonds, they are under the great influence of inflation while stock investors may not feel it so much. Stocks have some other kind of risks, for example, liquidity risk. Such a problem bond investments don’t have.

Firstly, stocks are the riskiest investments, but they also give excellent potential for high returns. Stocks or equity investments cover stocks and stock mutual funds.

Bonds or Fixed Income Investments cover bonds and bond mutual funds. They’re less risky than stocks but generate lower returns than stocks.

The third-place belongs to cash or certificates of deposit, money market funds, Treasury bills, and similar investments. They are giving lower returns than stocks or bonds but carry a little risk also.

What are stocks and bonds?

To understand what is riskier, bonds or stocks we have to make clear what each of them is. There are two main concepts of how companies can raise money to finance their businesses. One is to issue stocks and the other is to issue the bonds.

Stocks and equity are the same. Both define ownership in a company and can be traded on the stock exchanges. Equity defines ownership of assets after the debt is paid off, so it is a bit broader term. Stock relates to traded equity. Equity also means stocks or shares.

In the stock market tongue, equity and stocks are the same.

Stocks

Stocks will give you an ownership stake in the profits of the business, but without the promise of payment. That’s why stocks are riskier. The companies may decide to pay dividends but nothing else is an obligation. While holding the stocks the value of your investment will vary related to the company’s profit. Stocks are also dependent on investors’ sentiment and confidence. Anyway, stocks are safer for companies since they are a sure way to raise the money needed to maintain business. For investors, stocks are riskier since the companies don’t have any obligation to provide any kind of return. If the company is growing and rising profit, investors will obtain capital gains.

Bonds

Bonds are parts of debt issued by companies and transformed into assets to be able to trade in the market. Bonds give fixed interest rates also called coupons to bondholders. The companies have to pay the interest rate before any dividend to stockholders. Otherwise, the bonds go into default. Also, bonds are conversely related to interest rates, meaning, when rates go up, bond prices drop.

Can you see now? How to answer the question of what is riskier, bonds or stocks? For investors, stocks are a riskier investment, for the companies, the bonds are riskier.

Bonds vs Stocks

The majority of investments can be classified as bond investments or stock investments. In stock investment, you are buying an asset and your profit depends on the performance of that asset. If you buy a y a thousand shares of Tesla, your profit is based upon the stock dividend which Tesla pays (if any) and upon the fluctuation of the value of Tesla shares.

In a bond investment, you actually loan money to a company or a government. With a bond investment, your profit is not related to the performance of the company. If you buy a $2,000 bond from Tesla, for example, and the company earns a record profit, your profit will be the same as if Tesla didn’t make a profit at all. But here is the risk involved with the bond investment. What if the company is unable to pay back the debt? You can lose all your investment.

Stock investment is recognized as a higher risk. But risk makes a profit, therefore you will earn a higher return over the long term.

So, what is riskier, bonds or stocks?

Risks and rewards of stocks investments

Stock investments offer higher risks but greater rewards. A lot of things influence that. An increased sales, for example, or market share, or any improvement or development of the company’s business, literally anything can shift the stock price and skyrocket it. So, investors can earn by selling them or by receiving the dividends.

Any company can succeed or stumble. That’s the reason why nobody should invest in just one company. Do you know the saying: Never put all eggs into one basket? But if you hold stocks from several companies you will ensure high returns over the long term.

But, so many investors couldn’t watch the unfortunate events without selling their stocks at a loss.

Well, if you don’t have a stomach for that just stay away from the market or, which is a better choice, diversify your investment portfolio. Add some bonds-based investments, that will help you when the stock market gets rough. Moreover, a well-diversified portfolio will give you a bumper by providing lower volatility and calm play. So, you will not be forced to sell your investments and feel stress while making decisions.

Bottom line

So, do you have the answer what is riskier, bonds or stocks?
Yes, stock prices fluctuate more than the prices of bonds but that doesn’t necessarily mean more risk for the investor. There are a lot of cases when bonds are riskier than stocks.

For example, over a high inflationary period when inflation is surging quickly, the bond price can be damaged, decreased. The inflation will decrease the value of payments, and the bonds will mature less valuable.

On the contrary, stocks can boost their prices during inflation. The companies could raise prices of their products and increase their profits. That would raise the value of their stock, even higher than the inflation rate.

Can you see how the bonds might be riskier investments than stocks?

During the regular economic conditions, stocks could be much riskier than bonds.

Stock prices could sink sharply. Hold! Don’t sell! Wait for a while, wait for a stock to bounce back in price. And you know what, when the stock prices are falling, there is no better moment to buy them and hold. Just pick a well-established company.

The point is that bonds are not always the safest asset. They can be very risky. In some scenarios, stocks can be a much safer choice.

Savvy investors will buy both to diversify portfolios. Of course, how many of each you will hold isn’t set in stone. You can change it over your lifetime as many times as you want to reach your goals and earn a profit.

21st January 2020
Traders are Worried Due Economic Recession

3 min read

Gorica Gligorijevic

Investors are worried due to the economic recession. Traders have invested a huge capital into bonds over the past 3 months. Actually, they invested a record $155 billion into bond funds during the past three months.

So, what’s going on? This activity shows that traders and investors are looking for safe assets and the global crisis is on the door. Traders are purchasing sovereign debts. If they continue as it seems they will, we can be pretty sure we will have a huge recession. This trend isn’t good.

Investors prefer bonds as increased global economic difficulty induces a need for safety.

According to data collected by Bank of America Merrill Lynch, investors put a record $155 billion into bonds during the last three months. And we all know what is the safest investment when crisis knocks on the door. The government bonds are the safest assets.

Worries expressed in money

In just one week, the week behind, the bonds lured $7.1 billion. For one week only. By the way, it was one of the biggest inflows ever.

Investors have a risk aversion. They don’t like to see their capital is at risk. And as they recognized the symptoms of this financial illness called the economic recession they started to invest in safer bonds. But their action caused another problem. Everyone in the markets feels anxiety, the trade tensions are rising along with worries the global economy is worsening.

The markets are volatile and everyone would like to put money in assets that perform better during the crisis.

“What we’re seeing from a risk standpoint at this point in the market is really investors that are seeking haven in longer duration US treasuries,” Charlie Ripley, a senior investment strategist for Allianz Investment Management, said Markets Insider in the interview.

What does stand behind this traders’ action?

Fear! Fear of a coming economic recession. Fear is a powerful force. And that fear is caused by an inverted yield curve. It appears for the first time since 2007, and traders and economists noticed it several days ago.

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That’s important because such an inversion has happened before every economic recession since 1950.

The yield curve is inverted again. Meanwhile, China ramped up its trade war with the US. The previous developments in trade war have pushed companies of an economic slowdown. The new situation added more stress to investors.

Trump’s “Sorry”?

President Donald Trump, at a press conference at the Group of Seven summit in Biarritz, France, said he was not concerned that his more volatile attitude toward China would threaten stability in the global economy.

“Sorry! It’s the way I negotiate,” he told reporters. “It’s done very well for me over the years. It’s doing very well for the country.”

This comment occurred after a woozy week of economic announcements from the White House. These reports have caused uncertainty among businesses and investors.

Trump said that China asked the US to restart consultations and negotiations. He also said about President Xi Jinping that he is “a great leader who happens to be a brilliant man”. Yes, only a few days before, he called him “enemy”.

The Global Times, an organ of the Chinese Communist Party, also disputed Trump’s enthusiasm.

“Based on what I know, Chinese and US top negotiators didn’t hold phone talks in recent days,” the Global Times editor Hu Xijin wrote in a tweet. “The two sides have been keeping contact at the technical level, it doesn’t have significance that President Trump suggested. China didn’t change its position. China won’t cave to US pressure.”

All of this caused great uncertainty among investors. We will follow what is next.

28th August 2019
The Yield Curve is Inverted – Be Worried

5 min read

by Gorica Gligorijevic

The yield curve displays the price of borrowing money in the bond market. In essence, it is a way to measure bond investors’ feelings about risk. The yield curve has a great influence decision about your investments in the bonds market.

We are very often talking about interest rates as all rates work in the same way. But the reality is far more complicated.
You’ll find rates on different bonds behaving differently from one to another. It depends on their maturity.

A yield curve gives us the possibility to clearly see this difference.

It’s a graphic representation of the yields available for bonds of equivalent credit status but different maturity dates. A yield curve can be used to estimate the direction of the economy if we are analyzing government bonds.

The yield curve follows the interest rates of bonds. And particularly important is the spread between 2 and 10 years Treasury bonds. Using it you can measure the way investors think about risk and prospects for economic growth.

When investors are worried or get nervous about economic growth, the yield curve inverts. What that means is that short-term interest rates become higher than longer-term ones.

The short-term bonds carry lower yields as a reflection of the fact that an investor’s money is at less risk. The reason behind is the longer you invest, the more you should be rewarded, or rewarded for the risk. You can see the normal curve yield when bond investors suppose the economy to develop at a normal pace. The investors don’t feel there will be some radical changes in the rate of inflation or significant gaps in credit availability.

But sometimes, the curve’s configuration diverges. That is a signal of possible turning points in the economy.

Then we can say it is an inverted yield curve.

Many studies confirmed the ability of the slope of the yield curve to predict recessions. And in the past 50 years, every recession in the US followed such inversion, while only once the inverted yield curve was not followed by a recession.

An inverted yield curve marks a point on a chart where short-term investments in bonds pay more than long-term ones. When they turn up it is a bad sign for the economy.

Receiving more interest for a short-term rather than a long-term investment doesn’t seem to have any economic sense.
To make this clear, when you put your money in the bank, the bank will pay you interest rate. If you put your money on 6 months the interest rate is lower than if you put it on 6 years.

But can you imagine if this was inverted? Imagine the situation when the bank pays more for the 6 months than the 6 years.

That is happening when the investors’ fears of an impending recession are growing. In such periods investors are selling stocks and shifting their money to the long maturity bonds. That means they don’t trust in the economy and want to secure their capital until the storm passes. Honestly, it is a better solution than potential losses they could make by holding stocks during the recession.

But, what happens?

As demand for bonds increases, the yield they pay decreases.

This kind of investors’ loss of confidence is followed by an inverted curve yield. We can see that since 1956.

Also, the inversion started in December 2005 and announced the Great Recession. It actually started at the end of 2007, but the full-blown crisis occurred in 2008.

Furthermore, an inversion was noticed before the tech bubble burst in 2001.

That’s why inversion is so horrible. Does this mean that we have a big downturn in the stock market? Not for sure.

Inversion of the US Treasury yield curve caused a great reaction in markets last week. Losses were around 3% for the major US indices in one day. The media were on fire. And the whole world as well.

Yet, the curve yield had reverted by the end of the week.

But it can invert again in the coming months. Let’s contemplate why fear may not be realistic.

First of all, investors would lock up their capital if they feel that that the yield on the long maturity will fall dramatically.
That would be a sign that the US economy was to slow noticeably.

But investors will buy bonds when expecting price appreciation, also.

Last week in Europe, many bonds sloped down in yield.

That produced the stock of negative-yielding bonds to over $16 trillion.

Who will be the savior?

The European Central Bank. It can easily restart its large-scale assets-buying program and, by doing so, push its policy rates even more into negative.

The other reason, international bond markets are more connected than national markets. Meaning, what’s occurring to US yields is also a consequence of what’s happening abroad. We saw this last week when the US curve inversion reflected insufficient growth indicators from China, Europe, and Singapore.

Germany, Europe’s largest and most stable economy had an influence too.

On Sunday, August 18, White House trade adviser Peter Navarro told CNN‘s, Jake Tapper:

“Technically, we did not have a yield curve inversion. An inverted yield curve requires a big spread between the short and the long –we had a flat curve that was a weak signal of any possibility. In this case, the flat curve is the result of a strong Trump economy.”

The fact is that the inversion did happen.

Many experts admit this inversion should make you worried.

The yield curve “is one of the most reliable market indicators that we have and it’s not sending real warm and fuzzy signals,” said Mark Cabana, head of US Rates Strategy at Bank of America Merrill Lynch Global Research.

Yes, the inverted yield curve isn’t a 100% sure sign for inflation or recession but, according to Bank of America, since late March, the gap between 3-month interest rates and 10-year has inverted on and off.

22nd August 2019
Why Zero Bond Yields Happen

Bond yields in high-level markets are declining for the last 20 years. What is happening with negative or zero bond yield?

By Guy Avtalyon

Zero bond interest rates mean that the yields of the bonds are 0%. This indicates a monetary policy that aims to stimulate the economy but is approaching its short term limits as the short term interest rates can’t be negative. This situation indicates that monetary-policy makers and markets see increased deflationary pressure on the currency of the country.

This leads to long term bonds’ interest rates to be negative. For example, in Germany the ten-year bond yield is negative, it is minus 0.02 percent. Actually, $13 trillion worth of bonds is giving negative rates. This interest rate will be accruing nominal losses to investors until 2030.

In Japan, low-interest rates on a bond are predicted to stay zero or negative even longer. The 10-year bond yields in the US are a bit above 1% and the UK about 2.4%. Both countries suggest a minimum or no tendency of raises in the near future.

Moreover, bond yields in high-level markets are decreasing for the last 20 years which was unbelievable just 2 decades ago.

Why zero bond yields happen now?

The financial crisis in 2008 loan growth shifted negative and continued to be depressed for a long time. It happened because households and companies had too much debt and they wanted to pay down debt. They wanted to have no debts even when the central banks started cutting the interest rates closer and closer to 0%.

The same case was seen in Japan in the 1990s during the Lost Decade.

Bonds interest rates are market prices, meaning they are a measure of the supply and demand of bonds. The demand is driven by a desire for low-risk assets. And bonds are a less risky asset than stocks because they offer fixed payments for an exactly fixed time. The bondholders will take something even if the country or company that issued bonds experience the crash. The interesting thing about bonds is that the riskier bond is, the pay-out is higher because investors are compensated for accepting the higher risk.

Today, the bonds are less risky than ever. The investors are buying bonds with lower yields. Low-risk assets are exceptionally good-looking when markets are unpredictable or uncertain. For example, today in the US you have investors worry that a recession caused by a trade war with China could crash the stock markets.

That’s why even negative bond yield rates are more desirable than the other choices.

Moreover, pension funds usually are buying bonds, no matter how high or low is the rate. Either from prudency of fund managers or the regulation. For instance, German pension funds hold bonds more than other assets because they can invest only 35% in risky securities.

How does this impact your investments?

Well, it depends on what is your outlook as an investor, meaning are you, borrower or saver. That will determine your benefit from zero bond yield.

Low rates can be very bad for retirees. They more often hold more bonds. Retirement investment expenses have grown amazingly costly. Baby boomers may have profited from economic increase and growing stock markets. But their retirement is much more costly also. Anyway, savers and pensioners are punished when the nominal value of their investment falls.

Actually, everyone will get a lower return on investments, or be forced to take more risk to generate a higher return.

If stock prices decline that will cause more economic instability. On the other hand, a lower cost of capital can boost investment and push more growth. That will be the benefit of everyone. And this possibility is the driver behind the policy of cutting interest rates by central banks.

Why a zero bond yield is bad?

If the price is zero, savers will accumulate less and get less return on prior savings.

Imagine this deal as an example of zero bond yields. You borrowed to some company $1,000 today and it will return $900 or $1,000 with no interest rate to you in a decade.
What?
This is exactly what is happening with negative or zero bond yield. That is not how it should work. You have to make a profit when you put your money in the market or the bank.

Nicholas Colas, the co-founder of DataTrek, explained: “Bonds are supposed to pay the owner of capital something to pry the money out of their hands.”

But, some really wise investors have invested almost $15 trillion in government bonds that offer negative interest rates, per a report of Deutsche Bank. That is approximately a quarter of the overall bond market.
Negative interest rates of long term bonds in a situation of the zero-bound interest rates allow politicians to give more promises waiting the day when interest rates return to rational levels, and taxes rise to pay for it all.

11th August 2019
Greece announced the bond issue

Greece announces bond issue under the new government. According to the Associated Press, the new government of Prime Minister Kyriakos Mistotakis plans to issue of a 7-year bond. It will be the first under the new government.

In a report published Monday, 15. July, Public Debt Management Agency of Greece listed banks on the control of running the auction. PDMA reports are usually presented on the eve of the auction.

Greece is deemed to establish a 2.5 billion-euro ($2.8 billion) goal for its latest bond issue. That should complete market borrowing requirements for this year.

The previous bond auctions were successful. The government under Syriza and ex-prime minister Alexis Tsipras issued 5-year and 10-year bonds.

Greece rose funds on bond markets after a series of three consecutive international bailout programs.

Low yields in EU countries were helpful.

The new prime minister, Kyriakos Mitsotakis, has chaired his Cabinet’s first meeting. He promised to reform the system of governance. The main goal is to improve the everyday lives of Greeks, he said. Also, he urged the other members of the new government to follow this intention.

Greece’s conservative New Democracy party won the national election on July 7, 2019. This party defeated the ruling Syriza party.

New Democracy returned to power with decent success in snap elections. Prime Minister-elect Kyriakos Mitsotakis said he had a definite mandate for change, promising more investments. Also, he promised to decrease taxes.

“I am committed to fewer taxes, many investments, for good and new jobs, and growth which will bring better salaries and higher pensions in an efficient state,” Mitsotakis said.

Greece had a positive result after analysis by its EU partners who loaned Greece billions.

The economic matters in Greece

The focus is on Mitsotakis’s choice for the key economics ministries – finance, energy, and development. The minister of Foreign affairs come along with them.

Mitsotakis inherits an economy that is growing at a moderate growth. It is at a 1.3% annual pace in the first quarter of this year.

The public finances may fall below the targets accepted with lenders.

The Bank of Greece predicts that 3.5% of GDP primary surplus target without debt servicing outlays is possible to be missed this year. Its prediction is that Greece can reach 2.9% of economic output reasonably.

The fiscal policy of the new government has to be rigorously watched.

But, the true test will be next year’s budget.

People in Greece live on the financial edge.

The young people are leaving the country in order to find jobs outside their country, in the EU.

Greek unemployment of 18% is the highest in the EU.

Greece remains under monitoring from lenders guarantee to avoid potential future fiscal slippage.

The economic growth has returned since Greece wrapped up its last economic adjustment program in 2018.

New Democracy has promised to create well-paid jobs. Honestly, they will have a hard job to answer the activities in some parts of Athens, where powerful anti-establishment movement is alive.

Living in Greece is difficult

The average monthly salary in Greece is about 600 euros. People, especially the young, are struggling to find decent jobs because of the absence of big international companies.

The expense of living in Greece is relatively lower than in the rest of Europe. But despite romantic expectations, it is difficult and struggling.

The per capita income is 18,613.42. That is almost 1/5 of Switzerland’s, for example. Yes, goods are cheaper there than in the rest of Europe. But the average salary isn’t enough so the people are hard to survive from pay-check to pay-check.

The new government has a great challenge.

16th July 2019
Select Mutual Funds By Using Relevant Criteria

Examine fees and exit loads, read the offer document, analyze portfolio and holdings but here is a lot more.

By Guy Avtalyon

When starting to make the investment decision it’s important to know what criteria to use to know how to select the right mutual funds. If you don’t know anything regarding mutual funds and you are interested to invest in mutual funds, you are always confused about where to begin.

That’s the beauty of investing in mutual funds! You do not need to be an expert or even a finance freak to start investing in mutual funds.

One of the most frequent questions is how to select the right mutual funds to invest in.

Who manages mutual funds?

Mutual funds are managed by professional managers.

But not all funds are equally well. There are many funds that are not able to beat the index. That’s why it’s really important for you to select the right mutual funds that will fulfill your investment goals.

Most beginners just look at past performance while researching the best mutual funds to invest. But there are two equally important factors to be checked before selecting any fund: The objective of the fund matches your investment goals and what are the different risks associated with the fund.

Mutual fund investing is a long-term ratio. It’s different from the direct investment in stocks, where people can change the stocks fast, mutual funds are a long time task. Most people hold their funds for over 8 even over 10 years. Hence, it’s important that you choose the right fund and avoid ones that might result in you to lose both time and money.

How to select the right mutual funds?

I’ll show you, step by step.

Read the offer document: One of the most voluminous documents, also known as the prospectus. The first and the biggest step while choosing a mutual fund is to read the offer document. From the top to the bottom.

There you can find all the important details like the fund’s objective, scheme type, past performance, details about the asset management company, classes of the underlying assets, etc. It’s not difficult to understand these documents.

Match the goal of the fund with your own. Every mutual fund has a specific aim. And based on that aim, they decide different factors like asset allocation (equity to bond weight), risks, dividend payouts, tax benefits, theme/sector focus, etc.
You have to read the offer document of the fund in order to identify whether the fund aims to meet your investment needs. If their aims are not pertinent to you, it might not be the right option to invest in those funds.

Examine fees and exit loads. The mutual funds will charge a fee for their services and to meet different expenses. This expense ratio can be 2-2.5%. Some mutual funds may charge you a fee upfront when you invest (entry load), or a deferred sales charge when you sell your shares (exit load). As a value investor, you should stay away from mutual funds with high fees and loads to avoid unnecessary costs.

What criteria to use to know how to select a mutual fund?

Examine the past performance of the fund. The past performance of a fund isn’t a guarantee of how well it will perform in the future. But it will give you an approximate idea about the returns and expectations. You should compare the funds’ past performance to the benchmark because it will give you a better idea of its actual performance. Stay focused on long-term performance (3 years or greater) and compare it with its competitors and index.

What else can you do?

Analyze portfolio and holdings. This may be a little tricky for new investors. The main question is how will you understand whether the holdings are good or bad? The key point is to make sure that the fund is investing in the type of securities in which you are interested. Analyzing the portfolio will give you a good idea if the fund is the right fit for you or not. There is also another trouble while analyzing the portfolio and holding. The portfolio can be changed from time to time. The manager may choose to buy or sell securities because the managers are independent. And if you are not regularly reviewing the fund, the current allocation might be a little different from the time when you invested in the fund. That’s why you should always review your fund every six months after purchasing to confirm that fund achieves your goals.

Check your fund manager. The fund manager is the one who makes all the major buy/sell choices on your behalf. That’s why you have to find out more about the fund manager. Find how long this fund manager is handling the fund. Check if the fund manager has other funds for managing. If the other funds are also doing alike good, then it is a good sign. But if just one fund is performing well, while the other funds are struggling, then it might be a problem.

Check the credentials of the fund house. You do not want to get involved with a troublesome fund house which might bring you problems.

The procedure to select the right mutual funds to invest requires a careful study of the fund. To whom you can trust? Better make your own decisions based on examinations.

And a very important note: Do not rush with investing. There are hundreds of mutual funds in the market. Take your time to analyze them and find out the one that best suits your goals.

Happy Investing!

1st October 2018
What is Mutual Fund Investment?

Can mutual funds give you better returns, are they safer investment choice, what are types of mutual funds? Read all here.

By Guy Avtalyon

A mutual fund is a company that puts together money from many people and invests it in stocks, bonds, or other assets. The investment portfolio of a mutual fund is a combination of stocks, bonds, and other assets. When an investor acquires shares of the fund becomes the owner of the part of these holdings.

Mutual funds investment can give you a better return in a much safer way

The performance of mutual funds depends mainly on the fund manager who manages the fund on your behalf. Making the decision based on knowledge, picking a well-performing fund manager is utterly important to your success. For all of that, you should need some basic information on mutual fund investment.

OK, you own the mutual funds comprising a collection of stocks and bonds. That is your upper hand.

Why? First of all, it allows you to buy in with notably less money than it would take to purchase the same portfolio of stocks/bonds on your own. Second, you spread the risks out there among a group of investors if something goes wrong.

How the mutual fund portfolio is structured

It isn’t one single stock or bond of one sector alone. Therefore you can reduce your risks of losing your money to a greater extent. Always keep in mind that you may be the worst loser in the stock market due to a periodical deep cut in share prices. True is, there is no full-proof method or strategy that is completely safe and without risks. That’s the fact. But, mutual funds have lower risks than many other investment options. This makes them suitable for novices, traders who lack proper knowledge and skills in the investment market.

Mutual funds often have much better rates of return than the average savings account at the local bank.

Besides that, you may have minimum risks in this type of investment compared to other more risky ventures.

Even more, if you have some idea of which sectors are performing well, you are at an advantageous position of choosing a good sectoral fund. But be cautious, you should select a well-rated company. Diversification is the key to a healthy portfolio and mutual funds will help you get a diversified portfolio.

This is one of the safest ways to invest your money in the long term if you are young enough and in no hurry for retirement because the most mutual funds do not have the high payoffs that many investors seek to include for their retirement planning.

What are the main types of mutual funds?

Essentially, there are three types of mutual funds with some variations on each:

Money market mutual funds are an open-ended mutual fund. These types of funds invest in short-term debt securities. This is regarded as safe as bank deposits yet providing a higher yield. These funds are great for long-term investors. This slow and stable access to investing is better than leaving your money in an interest-paying savings account.

Equity funds that may provide slow growth over time with some income along the way.

Fixed income funds are created to provide a current income. This is great for those who have retired or for investors who are extremely conservative.

Besides this, you need to have certain basic knowledge about diversifying your portfolio of rated mutual funds. That can give you an attractive return with the highest safety. In a roar bull market, investing in Diversified Equity Fund is the best option (60% of the total fund), then comes Balanced Fund (20%), followed by Midcap Fund (10%), Small-cap Fund (5%) and Liquid Fund (5%). If you’re a conservative trader, you may opt-in Debt Fund. But if you’re optimistic, you can go for index funds as a systematic investment plan. Index Fund can deliver you a very profitable return in a bull market. Why? Because index fund includes highly rated performing stocks with diversified sectors and reliable.

One of the benefits of investing in a mutual fund is that offers professional investment management and potential diversification

Ways to earn money by investing in a mutual fund:

Dividend Payments. A fund earns income from dividends on stock or interest on bonds. The fund pays the shareholders almost all the income, lower for expenses.

Capital Gains Distributions. The price of the securities in a fund may grow. By selling a security that has increased in price, the fund has a capital gain. At the end of the year, the fund shares the capital gains, lessen by any capital losses, to investors.

Increased NAV. When the market value of a fund’s portfolio rises, the value of the fund and its shares increases also. If the NAV is higher the value of shareholders’ investments will be higher too. NAV is calculated by adding up the current value of all the stocks, bonds, and other securities, including cash, in its portfolio. Then, subtract the manager’s salary and other expenses, and then divide that result by the fund’s total number of shares.

All funds carry some level of risk. It is possible to lose some or all of the money you invest. The reason is obvious, the mutual fund holds securities that can decrease in value. Dividends or interest payments are also changing along with changes in market conditions.

A fund’s past performance is not important because past performance does not predict future returns. But past performance will never tell anything about the future performances but can tell you how volatile or stable a fund has been in the past. If you find a fund had more volatility, that is a sign that there are higher investment risks.

Every mutual fund must file a prospectus and regular shareholder reports, that’s by the law. Read the prospectus and the shareholder reports before you invest. Also, the investment portfolios of mutual funds are managed by investment advisers. You should always check that the investment adviser is registered before investing.

28th September 2018