What caught my eye this week.
Bit of a higgledy-piggledy digest this Saturday, which is right in keeping with a week in the markets that was all over the place.
If you sensibly follow The Accumulator’s advice to watch your paint drying and wash you’re hair a third time before you check out how your portfolio is doing again, you might not know things have gotten a little tasty.
As Merryn Somerset-Webb put it in the Financial Times:
Bonds are supposed to be boring. When they are not, you should pay attention.
That makes this week a good time to do just that. Bond yields are on the up: on Thursday the 10-year US Treasury yield hit 1.6 per cent.
That might not sound like much — and it is very low by historical standards — but it has tripled since the summer, with much of the action happening in the last few days.
It’s also not the direction we are used to bond yields moving in: for the past 40 years they have mostly gone down.
Inevitably share prices are readjusting as the prospect of negative (nominal) interest rates recedes – and as inflation twitches to life, just out of frame.
As yields on the theoretically safest asset in the world rise, more money will want some of that. You might scoff 1.6% won’t butter many panfried parsnips, but remember pension funds and others were buying safe bonds all the way down through zero.
At 2% or more, fixed income managers would be loosening their neckties and doing the graveyard dance from Michael Jackson’s Thriller.
Remember, too, that some high equity valuations have been predicated on very low interest rates persisting indefinitely.
As I wrote a few years ago:
Discounted cash flow models try to estimate the cash due from a company or property. They then compare this to the yield you could get from the lowest risk asset – a government bond.
Plug a historically low risk-free rate into such a model and you can get extreme valuations.
It’s possible to argue that everything from shares to housing is cheap.
That proved a good lens through which to see the future of equity returns over the subsequent years. Most shares – especially growth shares – rose from often already high valuations, unburdened by the gravity of interest rates.
Well, if yields rise a lot, it’s inevitable some of this will reverse.
Extreme growth share valuations will be harder to rationalize.
And income investors will move out of ‘bond proxy’ stocks and back into the real thing.
Market returns could be sluggish as a consequence. Some share prices will probably fall.
Pick your poison
We’ve long warned investors not to expect the unwinding of what they’ve decried as ‘a bond bubble’ to happen without any impact on share prices.
Super-safe government bonds yields are the gravity that permeate all valuations. It is all connected, in the long run.
But what to do about it now? Probably nothing if you’re a passive investor.
Merryn restates the case for shifting from a 60/40 portfolio on the grounds that bond prices could fall even as shares do. You’d possibly get no support from your bond cushion in a market decline, in other words. She suggests holding a bunch of other assets, including more cash.
Well, maybe. If you’re an active investor like me, knock yourself out. Even for passive investors, for years I’ve been suggesting you hold some of your bond allocation in cash as a response to low yields.
Cash – and the treatment of interest income – is a far more attractive to us little guys than to institutions.
But please don’t go crazy. If you own bonds in a well thought out asset allocation, you should probably keep most of them.
Check out the graph in the links below. It shows how a 70/30 portfolio has consistently matched or outpaced returns from the top 25% of – complicated and actively managed – US university endowment portfolios.
Those endowments are invested widely for various reasons (including career risk) but the result is the same.
Some of the best – and the majority of their lesser-performing brethren – could have just owned a couple of index funds, fired most of their staff, and seen better returns, at a lower cost.
What edge do you have that they don’t?
Markets don’t go up without going down. If you’re ten years from retirement, tweaks to de-risk may make sense. But really you should have been adjusting already, not just because yields are climbing off the floor.
Money is still super-cheap and abundant. The adjustments so far are small, and may yet – like the first signs of inflation – be mostly a head fake.
Or the regime of 40 years of declining bond yields may be changing. But please proceed in a calm and orderly fashion towards the exits.
Watch out for missing Monevator emails
Finally a couple of quick housekeeping notes.
The first is I’m going to sign us up to a proper email distribution service.
The one we use is free, creaking, and on deathwatch. Paid-for plans are surprisingly dear but should give us more flexibility in how we email you.
If our emails disappear, it won’t be because we’ve won big on the less-than-1% paying Premium Bonds, after all. (If I won the jackpot on the Premium Bonds, then Monevator’s future would be assured!)
No, it’ll be that something technical has SNAFU-d. You might want to check your spam folder, for example. If that’s empty, please get in touch.
Vastly more people get the email than read the site via RSS nowadays. But the several hundred RSS diehards should stay alert, too.
I hope to make the change soon. We don’t want to lose anyone!
Nominated under the influence
Finally, we’ve been nominated for a British Bank Award, run in conjunction with Smart People Money.
Monevator is in the running for Online Influencer of the Year – and it’s not even on account of @TA’s side-project of modelling onesies on Instagram.
You can read about all the nominations at the British Bank Awards website.
There were some new blogs on there to me. You might just find a gem.
When you’re done, you can vote for us if you’d like to, or for one of our worthy competitors. It’s a public vote, so I guess the most influential influencer will win.
Have a great weekend. Hopefully not long now before that won’t sound quite so tired, if like me you’ve been feeling the lockdown blues.
Decumulation: a real life plan – Monevator
If you only read us via email, check out the long comment thread, too.
From the archive-ator: Investment trusts now trading at a premium [From 2010, a reminder of how things fluctuate] – Monevator
Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1
Rishi Sunak expected to use budget to ‘start repairing’ the UK’s public finances – Guardian
Sunak also reportedly set to extend the stamp duty holiday to June… – Property Reporter
…and perhaps freeze the Lifetime Allowance for pensions – ThisIsMoney
London has more dollar millionaires than New York – Guardian
Britain sets out blueprint to keep Fintech ‘crown’ post-Brexit – Reuters
Call for SEC to regulate index providers as investment advisers [Search result] – FT
Cryptocurrency exchange Coinbase to go public, last valued at $100bn – Bloomberg via MSN
Year after year, a simple portfolio matches the best complex ones – FWP
Products and services
How green is your pension? [Search result] – FT
Disney+ hikes prices 33% in the UK, but it’s not the only one – ThisIsMoney
Yorkshire Building Society offers its savers a top rate of 3.5% – ThisIsMoney
Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade
Popular blogger J. Money is now curating content – at The Motely Fool
Win a luxury fantasy Welsh cottage for just £5 [Maybe] – Cwellyn Dream
Forget Bitcoin. Fintech is the real Covid 19 story, says JP Morgan – CNBC
Homes fit for a Masterchef, in pictures – Guardian
Comment and opinion
The relationship between money and happiness – Incognito Money Scribe
Levered work, balanced sheets – Krueger & Catalano
You don’t have to take the poor bet of trying to beat the market – TEBI
The [similar] risks of holding single bonds and bond funds – Humble Dollar
2020 retaught us the perils of over-confidence – Morningstar
Inheritance – Indeedably
“It’s been a while…” – My Deliberate Life
What to do when the market is manic – Morningstar
Career advice for high fliers: find a champion – Banker on FIRE
When you go from a start-up to working at Google – Noam Bardin
Payment for order flow isn’t nefarious [Nerdy] – Party at the Moontower
Collectibles, NFTs, greater fools: mini-special
The Bitcoin elite are spending millions on collectable memes/art – Wired
The psychology behind the boom in collectibles – AWOCS
Don’t know what an NFT is yet? Read this – The Business of Business
Speculative crypto art market takes off – Axios
Substack vertigo – The Reformed Broker
Format replacement cycles – Justin Paterno
Power to the person – Not Boring
Have fun staying poor [On Bitcoin bros] – Of Dollars and Data
Naughty corner: Active antics
Rule Breaker Investing: listener stories [Podcast] – The Motley Fool
The man who abandoned value – Institutional Investor
Individual stock ownership drives brand loyalty [Research] – SSRN
Charlie Munger holds court at the Daily Journal AGM [Video] – via YouTube
Good luck with the elusive illiquidity factor – Advisor Perspectives
UK Vaccine rollout phase 2: who gets the jab next? [Video] – BBC
“Do not wreck this now”: Van-Tam warns against breaking rules – Guardian
Why so many of us hit the ‘pandemic wall’ and what it means – Medium
FDA endorses J&J’s one-shot Covid vaccine – Stat News
How to know when the pandemic is over [US but relevant] – The Atlantic
Kindle book bargains
Total Competition: Lessons in Strategy from F1 by Ross Brawn – £0.99 on Kindle
Black Edge: The Quest to Bring Down the Most Wanted Man on Wall Street by Sheelah Kolhatjar – £1.99 on Kindle
Quit Like A Millionaire by Kristy Shen and Bryce Leung – £0.99 on Kindle
The Six Conversations of a Brilliant Manager by Alan J. Sears – £0.99 on Kindle
Get a Kindle and save time, space, and a tree.
An expert’s guide on making your clothes last forever – Guardian
Bill Gates: not just another billionaire with a plan – SL Advisors
The Green Homes Grant only met a tiny fraction of its target – Guardian
Bitcoin’s climate change impact may be smaller than thought – New Scientist
Off our beat
Aung San Suu Kyi tattoos flourish among Myanmar’s resistance – Guardian
Pranksters show horrors of robot dog by giving it a paintball gun – Daily Dot
The disabled influencers making their mark on social media – BBC
Gambling versus shares [Video, funny] – Foil Arms and Hog via YouTube
It’s okay to take a walk without headphones – Rad Reads
“The idea that the future is unpredictable is undermined every day by the ease with which the past is explained.”
Daniel Kahneman, Thinking, Fast and Slow
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