But if you are concerned about a crash due to tariffs and such, those high yield (often referred to as “junk”) corporate bonds are far from a safe haven. Companies with expensive debt are the most vulnerable to defaulting in that circumstance. That is a fund of higher risk loans. And in this case not risk as a synonym for volatility but for true loss.
Yes, of course I understand that.
I moved a bit into SPHY over the summer because I was looking for yield and I was looking to have a bit more in bonds. The yield on things like the total bond market index funds is around 5%, barely better than the MM at the time (now, ok, it’s a 1% improvement). Of course, I didn’t know at the time we’d get Trump back; I was confident then that he would not win. Oh well.
The average duration of the bonds in SPHY is about 3 years, which helps keep the risk down. But sure, if tariffs were definitely coming this might be a position to liquidate.
I’m sitting on a decent wad of cash in my IRA, and I might sell all or part of my QQQ and take profits + reduce risk, adding even more cash.
Fidelity pays pretty well in their default cash position (fluctuates but right now ~4.1%), but I am strongly considering moving at least half my cash into JAAA, a Janus CLO fund that has become very popular as of late. Yield is currently a bit over 6%, and their price and NAV have been stable.
That will give me cash generating good, reasonably safe income yet very liquid (daily volume is quite good).
Given that CLOs are
Collateralized loan obligations (CLOs) are a form of securitization where payments from multiple middle sized and large business loans are pooled together and passed on to different classes of owners in various tranches.
I must admit I’m wary of them. This is precisely the kind of thing that led to the 2008 crash.
Who knows what’s inside that ‘pool’?
Yeah. When CLOs crash, they’ll crash hard and fast. Very brittle to contagion.
I’d much rather own a junk bond fund than a CLO fund.
You are quite right to be skeptical, and I’ve not had direct experience with this type of product before. As I understand from reading what non-affiliated financial folks say, the AAA tranch of CLOs are at the top of the heap - that is, if things must unwind, they start at the bottom and die from there, with equities suffering before the AAA tranch (forgive my inelegant and poor novice description).
JAAA itself launched in late 2020, so it was not tested during 2008.
VanEck has a paper where they say:
Nothing except cash is 100% safe, and in this environment, some wonder if even Treasuries are even safe. But it seems AAA CLOs might be at least as safe as investment grade bonds, in my novice mind.
My faith in those ratings: ‘AAA’ etc, by Moodys or S&P has been completely eliminated by the 2008 crash. Somehow things that were rotton with worthless subprime mortgages nonetheless managed to finagle a good rating.
It seems that a lot of shenanigans went on under the covers that may not have been technically illegal but probably should have been. And while some loopholes may have been closed, I suspect there are plenty left…
Sorry to beat on this, but what is the reason you were looking to have a bit more in bonds? I mean in terms of the function they serve to you in your portfolio?
Based on the advice of my multi-millionaire BIL, who has made his fortune in the financial world, I am at the moment moving about 30% of my portfolio to individual corporate bonds. I plan to hold them all to maturity (2 to 7 years), and they will provide a steady (albeit not great) income, free from the vagaries of the stock market and the interest rate. As the bonds mature, I will then either purchase more bonds or buy another fixed-income source, like CDs or Treasuries.
I am at the point of my life where I need to preserve much of the money I have invested. Bonds are good vehicle for this.
I’m kind of a numbers guy, so I’m a bit hesitant about making broad sweeping predictions about what the market might or might not do based on short term sentiment and emotion.
In truth, I started putting my new money into bonds, not moving it from elsewhere. I realize the way I stated it made it sound like I was moving. The reason is that I’m so heavily into the S&P 500, and it’s up 78.99% over the past 5 years as I write this, so I was trying to diversify a bit. I mean, this isn’t outside of conventional wisdom. This is not an IRA. This is a brokerage account, and that’s money I could decide to spend at some point. For instance, there’s a new kitchen in the plans, and so having some less volatile makes sense to me. This is besides the cash emergency fund, FWIW.
All that said, I see today we have fresh new tariffs and markets are up. I don’t know what reality is anymore.
Well, so, let me make the argument against US cash and bonds.
There is some chance that, among the current administration’s goals, devaluing the currency is one of them:
https://www.politico.com/news/2024/04/15/devaluing-dollar-trump-trade-war-00152009
Let’s say that I’ve saved $1m on cash, and I’m simply holding that as real dollar bills. The US government starts pumping out checks to all citizens and increases the total number of bills in circulation by 10x in an attempt to bring wages into line with China.
There’s a lot of uncertainty here but, quite likely, the purchasing power of your $1m is now more like $100k. Granted, you’ve been given a whole lot of money through the government checks but - since those were going out equally to everyone (in our example hypothetical) - that is largely just a force to equalize your total cash holdings with everyone else in the country and, of course, most people do live check to check and the prices will have grown to reflect that.
If we say that, on average, you were living for about $75k a year (i.e. your total expenses), then it might now require about $750k. The money that you saved - your $1m - went from being equivalent to 13.3 years worth of savings to being a little over 1 year’s worth.
A US dollar position or something similar to it like a flat, unchanging percentage, has the potential to become nearly worthless. A 3% bond might be a little better than cash but gaining 3% when the value of the dollar has dropped by a factor of 10 is still basically nothing.
A percentage of ownership of some asset, like a company, on the other hand that has a much greater chance to maintain its value relative to a plunging dollar since the company is still generating products for the same slice of the public as it used to and taking in a similar slice of the economic pie.
And, of course, if you convert your money to some foreign currency then as the dollar is devalued, the value of your savings relative to dollars will largely hold stable.
I’d expect that if Buffett is holding his money in cash, he’s planning to put it back into the market as soon as possible since cash - during an inflationary period - is quickly falling behind.
In general I agree w your overall point. As to this bit:
Sorta true. Yes in the sense that if dollars are devalued versus, say, euros, a holding in euros will diretely equivalently appreciate in dollar terms.
OTOH, given the pivotal place the US economy holds in the world economy and the extra-pivotal place the USD holds in the pantheon of major currencies, anything that looks like an actual functional planned government devaluation of USD or worse yet a bout of super- or hyper-inflation, will destabilize the whole world economy. With all sorts of nasty effects on inter-currency valuations.
The sorts of “devalutions” that sane countries make are a couple to few percent, and spread over some time. Not the 90% being bandied about casually.
Note I do not put insanity beyond the realm of possibility with the current regime in charge. But I do think that if/when they actually do something insane, the rest of us assuming ceteris parabus and business as usual in the rest of the world economy is a mistake.
In general, I’d advise people against buying into any simple hypothetical, let alone one given simply for the sake of illustration of some of the factors at play.
That said, if everything’s falling but you live in the USA, which is falling the most, and you’ve parked your money in foreign assets/currency then you’re still gaining relative to the USA - which is the place that, eventually, you want to be spending your money through retirement.
I think you are very smart to be wary of those ratings. Read Michael Lewis’s The Big Short, where he absolutely eviscerates the ratings agencies, who were essentially bamboozled by the investment banks creating the CDO’s and giving them ratings dictated to them by the banks.
I’m not a sophisticated investor. I follow the mantra “only invest in things you understand.” I haven’t time to read, let alone understand, 350+ page prospectuses for CDO’s, CLO’s or other derivative investment vehicles.
Yeah the point of bonds is usually to diversify a bit and to decrease volatility some. Less probable gain in return for less risk. So the question is if a “high yield” (high risk) does that? They tend to track with the S&P and have more risk of completely losing value in a major downturn, I think.
Plus in the brokerage account side you are paying taxes on the yield…
Well, yes, but would I be better off putting in a mattress to avoid taxes? I’m already maxing out all my available retirement account options.
It is my opinion that the risk of SPHY is not terribly high, and thus worth it for the yields. It is undoubtedly less volatile than the S&P 500.
I am at the same point.
But on the other hand, since life can throw you a curveball at any time, I would rather not lock up assets into fixed term instruments which might penalize you if you are forced to liquidate them.
Not a fan of CDs for the same reason. While MM accounts pay about the same percentage, I’ll stay with those.
Of course if the fed rate goes down, we will have to reconsider.
Slightly off topic: it’s a bit funny how people think there is a ‘normal’ fed rate.
Lack of historical perspective: over the last 50 years it has fluctuated wildly, reaching 20% at times!
But that’s the thing. I have (hopefully) enough cash in MM and short-term CDs so I don’t have to liquidate my bond holdings. And I plan to hold my bonds to maturity. (He said, confidently.)
My limited understanding is that it is typically advised to keep the income producing investments on the retirement fund side, and the equity appreciation on the other, to degrees possible.
The only point though is that this fund is pretty much subject to very similar risks and likely very correlated with the stocks portion. If the point of bonds for you is to reduce the volatility and risks of being equities heavy then it might not be the best fund for that purpose. Did it drop much less a percentage than the market did in the last major corrections?