Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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January 2014 investment musings

  1. 2013 worked out as predicted: interest rates went up and stocks went up. I sold all my bonds and bond funds, went a little short the 30-year (TBF) and went a lot of long equities (VB being the best of a good lot; SCHD and VTI being the somewhat-laggard others) and that worked.

  2. My option-selling experiment taught me not to engage in option selling. Nothing bad happened but (1) it kept me from being fully invested in equity (2) in May when rates went up sharply, I end up owning some things I didn't really want. The choice it's left me with is to hold too much cash or to chase a rising market. It was educational and fun, but I won't do it again.

  3. My investigations into income-producing securities have made me think I don't want income-producing securities, at least for the time being. If I keep 5-years' of cash or so, I will be able to pay my bills and whether any downturn without selling; also, cash provides diversification from equities without owning bonds. Income means income taxes and capital gains are still the most tax-advantaged way to earn. VB is currently providing this.

  4. SCHD (and its big brother VIG) are supposed to be a compromise, owning the rock-solid dividend payers ... a form of "fundamental indexing"; these went up less than VB (~20% vs ~30%), paid only slightly-more in dividends and their history makes me skeptical of the proposition that they hurt less in downturns.

  5. I continue to ponder annuities (who doesn't want a pension?). With the current rate environment, neither purchased nor bond-ladder annuities are attractive. NY Life fixed immediate annuities have a 1.6% IRR; a 30-year US Treasury bond ladder has a 3.65% IRR, but that's up from 2.81% in November 2012, so I remain hopeful. The theory is that (1) the economy is improving (2) because of number 1, the Fed is starting to taper (3) because of both 1 and 2, interest rates are going up and will continue to go up, and equities will also go up. This worked last year and I'm thinking it will continue to work as long as we don't have any dreadful exogenous shocks.

    When/if the 30-year yields 5.5% (up from 3.75% today), the bond-ladder annuity will have a 5.20% IRR, which is beginning to look acceptable. Simultaneously, if we do actually get there then the economy will have had a multi-year bull run and maybe it'll be time to sell stocks anyway. So: 30-year = 5.5% => sell stocks, buy bond ladder for fixed income. If all works as planned, this is likely to happen in 2015 at the very earliest. Tax consequences are an unresolved concern.

  6. I continue to worry about knowing how to identify the next downturn. In 2000, I absolutely knew what to do but I didn't do it. In 2007 I noticed the anomaly in the E-mini futures markets but didn't connect it to the impending disaster. What will be the next signal? Will I recognize it? Will I act on it? We're very far into the bull market that began in 2009 and that is worrisome.

Originally published: Monday, January 20, 2014; most-recently modified: Wednesday, May 22, 2019