Yields suck now. If you're young, then you offset that with cheap access to capital. That has always been my perspective. There's a double edged sword.
I work in the primary markets helping large caps find debt capital. I have become so aligned with my clients pursuit of low cost capital that I have forgotten the other side of the coin. My liquidity concerns, coupled with just about everything and every strategy being black listed (no shorts, no trading anything that someone on the floor is working on... aka everything), has left me all cash since I started. I think I need to more effectively deploy my capital. Sorry that's an aside to my larger concern, why can't I solve this investment dilemma (read on).
I came to the realization of investment selection neglect after being asked a very simple question from my grandmother, "What should I invest in?"
Let's face it, most widowed older women are sitting on some small nest egg with little idea about the inner workings of macro economics, fed policy and the yield curve. Some yahoo FA told them all, years ago, that they could save up and live off a 6% yield from CD's. Now CD's pay nothing, and grandmas are far too risk adverse and ill informed to invest in anything else.
So how do you answer the question? What should Grandma invest in? She doesn't want to lock up her capital for 5 years (that far out on the yield curve isn't too appealing), stocks have too much principal risk, and bonds seem to have similar low yield issues in this market. The best thing I can come up with is, find three year 4% bond, lever up on margin 50:50 and make 4% on your money and if you're lucky a 1% spread on the borrowed money (4% bond less 3% borrowing cost). 5% yield at really low risk.
Anyone have a better idea? Looking for some current yield with little to no principal risk.
Preferred stock?
how about MBS? saw some wealthy clients holding it at my internship with decent yields
Retail investors can't efficiently lever up bonds, she'll get killed on the margin rates for retail investors. Not sure it's real smart for many people to lever up fixed income in this environment anyway, particularly risk-averse investors. Fidelity is charging at least 6.5% for balances less than $500k.
The reality is that she should hold a diversified portfolio of investments like everyone should. Stocks, bonds, commodities, MLPs, REITs. Everything should be mutual funds so she can't bitch about a certain stock or bond going down in value, since she can't see what is actually in there. Her portfolio should be heavily fixed income, but unfortunately, there's no magic bullet for her to cure the low yield problem.
Depending on her age and situation, she could look into a simple fixed annuity to guarantee a minimum level of income and invest whatever is left in a diversified equity/MLP/REIT/commodity portfolio. The older she is, the higher the payments. This would at least ensure that she won't outlast her money. Downside: if you die shortly after buying a policy, your heirs don't get any of that money.
Buy a house. Housing prices usually keep up with inflation (or better) and provide a good return (except for the past 5 years, of course).
www.lendingclub.com
I'll yield the fuck out of your grandma
Find the most conservative (read: mutual) insurance companies out there, and buy inflation-adjusted lifetime annuities under the state insurance cap.
Not quite treasuries, but close.
http://seekingalpha.com/article/878631-how-emerging-markets-local-curre…
The quick answer is at the end of this article. Get involved with some emerging market debt ETFs...
Don't pitch the bitch.
But seriously, if your grandma was smart, she should just give you all of her money, because you can take on a lot more risk than she can (and you know what you're doing).
Why do you think Buffett's initial plan was to mange his money until he dies before giving it to charity? In the long run, he will end up with more money to help more people.
Just tell her to come to Australia. We have term deposit rates from 5% and up, you can get 5.7% if you are rolling over and include bonus rates etc.
And this is at some of the safest banks in the world.
No concerns about a natural resources led bust?
To the topic of yield, why not common stock in some of the smarter, smaller community banks? A lot of them are super well capitalized, pay a decent yield, generate very high ROEs, are easy to understand and you can tell your grammy that she's investing back into her community. Plus, a good number of them are effectively backstopped by the FDIC because they don't want any more financial services consolidation.
IBM stocks. Old ppl love that shit, even if your the worst manager in the world, if you tell them your down because you hold IBM all is forgiven!
treasuries
US denominated LATAM debt
Utilities, bland manufacturing stocks with large dividends and a good history of paying them.
any examples? thanks
http://www.google.com/finance?q=sbs&ei=dpNnULjhEYuM0QHEuAE
This one is pretty easy.
Vanguard's Total Bond Market Index
https://personal.vanguard.com/us/FundsSnapshot?FundId=0084&FundIntExt=I…
0.22% expense
1 year return: 4.91%
return since inception (1986):6.79%
average duration: 5.1 years
Distribution by credit quality* (% of fund) U.S. Government 69.4% Aaa 3.8% Aa 4.1% A 12.0% Baa 10.7%
Please tell me if I am missing something but this seems like a no brainer home run to me.
5 years duration isn't terribly scary, but if 5-year interest rates go up to 5%, that's a ~15% loss. And if the yield is at ~1.5% where I think it is, you're not looking at much upside. Before we even start talking about inflation, $100 invested only means $1.50 in interest.
Also, .22% expense ratio doesn't sound like much on the surface, but that's 10-15% of your upside if the fund is only yielding 1.5-2%.
5% returns for the next five years sounds not only unlikely but impossible.
I still like the idea of annuities. "If I die, I don't care that much. If I live, that means 6%/year. Just as long as my actuary isn't Sicilian."
If I'm wrong please let me know so I can correct my understanding, but I think that if duration is 5 and interest rates increase by 5% then your loss is 25% (5 * 500bps= 25%) not ~15%
SEC yield is 1.5%. To be honest, I don't know enough about annuities to make an informed response. I've seen you talk about annuities in other threads so it sounds like something worth looking in to.
She should keep enough in cash to cover several years (3-5?) of living expenses, imo. I can't see an extra 100 bps real return being worth losses over that time period.
The annuity idea sounds nice as well.
You really need to look at these things in a portfolio context and in relation to assets/liabilities matching as opposed to simply comparing investment yields.
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