The Permanent Portfolio, Investing, Finance and Random Thoughts.
Oh No! Market Predictions for 2010…
Johnny Carson as Carnac the Magnificent
Here they come! The market prognosticators for 2010 are dusting off their crystal balls and sweeping their bad predictions for 2009 under the rug. If you want to read market predictions, I found it more educational to read only the ones from the year before and not the current ones.
I’m going to not name any names and let you read for yourself what was being said:
8 really, really scary predictions
If investors stayed in cash this year they lost money by missing the partial stock recovery that happened. Stocks are up over 25% YTD. Commodities are up 15% YTD. Gold up 25% YTD. Even High Yield “Junk” Bonds (an asset class I don’t like at all) are up almost 30%. Yet investors hiding out in Treasury bonds and cash have all had a rather bad year with either losses or basically zero interest being paid.
Listen to these market forecasters at your own peril. Investors should hold a balanced and diversified portfolio at all times. In my world, that means they should own stocks all the time, bonds all the time, gold all the time and cash all the time. Do this no matter what one thinks about the markets or what financial gurus are saying about the future. A well diversified portfolio will ensure that you can ride out bad markets and make money in good ones. Trying to predict the future can cause investors to make extreme decisions and can lead to huge losses. Always avoid extremes in investing! Financial gurus are into extremes because when they’re right they look like geniuses but when they’re wrong nobody remembers it. Market predicting really is a loser’s game
and I encourage readers not to play it with money that is precious to them.
No related posts.
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Hi Mike,
You don’t spread the risk by owning international bonds, you increase it. You take on currency risk. Not only do you need to then worry about the dollar, but also the euro, pound, yen, etc. Interest rates could be going down in the US due to a strengthening dollar, but going up in other places as their currencies fall. The net effect is you could lose in total value of your international bonds even though they appear to be paying a good yield. Since US citizens buy things in dollars it is an additional gamble wagering on currencies that you don’t use for your day to day transactions.
There is also currency risk with international stocks. If you overweight them and the dollar has a long stretch of strong growth then these stocks will appear to underperform the US markets. I think many people look at the last 10 years of good international stock performance for instance but don’t figure in the fact that the US dollar sank somewhere around 30% against currencies like the Euro over that time. So part of the performance was stock related, but some was a currency play.
I recommend keeping your variables as small as possible and not intentionally go out looking for foreign currencies as a way to diversify. It may work out, but it may not. The gold allocation is currency neutral and provides more than enough protection, IMO, against problems in the dollar. So I’d avoid the international bonds entirely and if you want to own some international stocks (I own a small amount myself) then I wouldn’t take it above more than 25% or so of your total stock allocation.
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#3 written by Mike Turner 2 years ago
Thanks for the response Craig! I have actually owned PRPFX and got out before the market tanked. Interestingly it is now at all time highs. Just goes to show you you can’t time the market. I will be interested to see your year end 09 results and rebalancing.
My only concern with TLT is that I would argue that we are in “no man’s territory” as we have never experienced such Quantatative Easing by the Fed Reserve – and the agency buying Treasuries to support borrowing – who knows how this will end, but it does give great pause to the traditional way of valuating an asset based on traditional supply and demand theory. I am wondering if there is a better asset class that does not have “government intervention” that would be a better substitute? – while I agree with you that we can never know what is in store for the various asset classes and it is all based on the perception of value, it is hard to purchase an asset class that is artificially supported.
And while various governments can purchase gold, you can’t “print” gold. Again, I believe TLT or LT treasuries now are a risky asset class-if the current QE doesn’t hold the economy together – the last bullet the Federal Reserve will have in its gun will be pointing inward
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#4 written by Mike Turner 2 years ago
Craig – Mike again. In researching my own question to you – and being part Canadian and having dual citizenship-perhaps the Canadian Long bond – Ishares traded on the TSE – symbol XLB might be an appropriate switch for me out of TLT? I realize there is currency issues although the Canadian Dollar has been doing better than the US dollar – and except for last year the Canadian Gov has been running a budget surplus and they have the Natural Resource component.
It appears the volatility is somewhat muted compared to TLT? My next step would be to put the Canadian bond return into the yearly excel spread sheet you have posted to compare. Any other thoughts would be appreciated? -
Mike,
I agree we are in no-man’s territory about what the Fed is doing. This is the best reason in the world to stay highly diversified because anything can happen now more than ever. I can come up with scenarios where deflation continues and LT bonds do go up again despite what the Fed does. In the end, the Fed is not omnipotent and can’t make people spend money they don’t have or don’t want to spend. This is what happened in Japan and could happen here. Japanese LT bonds are still trading in the 2% range last time I looked and they’ve been there for over a decade at least.
Re: Canadian,
If you spend time in both places or think you may it could make sense to diversify across both currencies. I don’t know much about the fund you listed though. As for the Canadian dollar, I recall that during the 1990s it did quite poorly next to the US dollar. So anything can happen there as well!
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#6 written by Lisa 2 years ago
Hi Craig
Enjoy your blog and admire your disciplined approach.
Would you mind answering a couple of questions for me?
1. I also have much trepidation about long term bonds. Why not diversify (even partially) into intermediate term bonds to cushion the blow – so to speak?2. My husband and I have seven accounts altogether – 6 ira’s and 1 brokerage account.
I have had great difficulty in the past trying to manage each of these accounts as 7 separate portfolios. Time consuming and expensive. Even tho the PP requires less fiddling, I would like to begin to manage them as one portfolio – for example, two iras invested in bonds, two in stocks, etc. Wondered what you thought of this method and am I missing some glaringly obvious drawback? BTW, I have about 10 – 15 years to retirement and 5 of the iras have relatively low balances, one is relatively large and the brokerage account falls in between.Thanks
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Hi Lisa,
Intermediate bond won’t provide the power that LT bonds will under a sustained deflationary event. I understand that some people don’t like them but the reality is that I’ve been hearing and reading these arguments about their dangers in books and articles for 30 years now. Eventually, these LT bond doomsayers will be right, but so far they’ve been pretty wrong.
2009 was a bad year for LT bonds if you just happened to buy them right at the peak in first couple weeks of January. But after that, they went down perhaps -12% at worst. In terms of the total portfolio even if you bought at the *worst* time you still were up 8% for the year. That’s with a -21% loss in LT bonds when bought at the peak.
But if you just can’t stomach the risk then you can use intermediate bonds but make sure they are Treasuries and not something of lesser quality. Also realize that if we hit a Japan-Style deflation pocket you could be exposed to losses in other parts of the portfolio that your bonds may not be able to cover.
Also realize that by splitting your LT and cash in half you effectively have a duration equal to most intermediate bonds funds. The split of cash and bonds works better than owning just a chunk of intermediate bonds because you get some opportunities to rebalance the bonds when they spike and have cash to buffer recessions when nothing in the portfolio is doing especially well.
#2 I’d try to consolidate accounts to make things simpler if you can. If you can’t do this, then yes you can simply park bonds in one, stocks in another, etc. to make life simpler. This could get complicated though with many accounts and account balances.
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#8 written by Lisa 2 years ago
Thanks fory your response Craig. How do you feel about GNMA for the variable portion of my portfolio? I know it seems pretty conservative, but I am really shell shocked by this whole bubble bursting business (in other words, I’ve lost a lot- not only in the stock market, but in my home value too, which I bought in 2005, unfortunately). The only thing is, with the huge potential leg down for bonds, I wonder how GNMA willl behave. In looking back ten years it looks pretty solid. Any thoughts?
Thanks again,
Lisa -
GNMA bonds have an inherent “call risk” in that the mortgage holder can refinance when rates are good and this can affect GNMA fund performance. For your bonds I recommend you only use Treasury Bonds as they don’t have credit and call risk like non-Treasury bonds. GNMAs could be fine for the variable portfolio, but I just don’t know. Personally if I’m going to take risk in my portfolio to boost returns I’d lean towards owning more stock and not trying to do it in GNMA bonds.
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Craig,
Do you see any advantage to swapping out VTI and TLT with VT (world stock market index) and BWX (world treasury bond index)? Might spread risk a bit more?
thanks for your thoughts,
mike