A.I.M. Users Bulletin Board

[OldAIMGuy]

Hi Ken, Re: Yield from bond funds, etc, and the search for an income stream...........

(apology in advance for this lengthy reply. what started as a quick note turned into a bit of an essay!)

I heard a speech from a fellow with a doctorate in Economics; he also happens to have authored a significant amount of federal legislation related to economics over his tenure as a U.S. Congressman and Senator.
http://en.wikipedia.org/wiki/Phil_Gramm
Unfortunately I can't find a link to that speech so far.

During the Q&A portion of his talk, he says the total mount of stimulus created by the FED far exceeded the economic gain realized. This discrepancy will have to be paid for sometime in the future. He states the irony of slow economic growth being possibly the "best" outcome of what has occurred. If the economic growth picks up, he feels the change in FED activity is going to startle both the stock and bond markets. Relative to the whole QE experiment, his final comment was, "I just don't see how this ends well."

One thing that is forgotten by investors in bond funds is that the sellers of those funds are motivated to keep the funds attractive to investors. They don't own a fixed portfolio of bonds, but a floating one. They are always changing their own internal ladder components to keep the yield as attractive as possible for the bond fund so that buyers will either keep or add to their holdings.

If/when we see interest rates rise here in the U.S. the typical long dated bond fund manager will start to roll out of the poorest yielding holdings and start to buy 'fresh' new and better yielding paper. There is a lag period that typically is painful for holders of those bond funds (especially if they aren't AIMing) but eventually the yield and desirability of the type of investment will start to support a higher bond fund share price.

Right now there is about 2% yield average from the Value Line 1700 portfolio of stocks that have a dividend. That's not 'high' by any means, but might be better than tying up money buying the current 10 year Treasury. The 2% yield for the Value Line composite is about in the middle of its long term range. During the 2011 downturn it got as high as 2.4% and in the panic of 2008-09 it rose to a remarkable 3.8%. The market's peak in 2007 took the yield down to 1.6%. In total range it doesn't seem like much, but in a world of "basis points" the range is quite broad.

So, like many other measures of market activity, the average yield as described in Value Line is just about "average" since 1995 (the earliest I've kept records). My feeling is that we have a lower stock market growth expectation than at other times, but the yield is doing its part to help total return. At any point in time we do need to review our goals and align our income requirements relative to portfolio construction. Right now, it is favoring keeping with the stock side of the investment world as that is where there tends to be slightly better yield. This has to be balanced with the idea of additional risk for that expected yield. As Clive's interesting 6 Part portfolio history showed, the best performing part changes nearly every year. Most of us are not blessed with enough prescient vision to guess the best of those six in advance! So, as the portfolio history shows, we might as well do the best we can while owning all of them. AIM helps to move the $$$ around in an incrementally sound fashion.

When rebalancing a portfolio of stock and bond investments while using AIM for each component, we receive an additional benefit in that much of the rebalacing can be done from the CASH side of the ledger. We can move cash from the overweight segment to the underweight segment without upsetting the "timing" of AIM's buying and selling decisions. Pure rebalancing doesn't allow for this.

I agree that there isn't a financial planner or advisor that even as recently as 10 years ago would have designed a portfolio with the anticipation of such artificially low rates of return on bond funds. Certainly the advisor of the 1980s would have tilted the Stock/Bond ratio in favor of bonds at that time with yields in double digits on bond funds and far lower on stock funds.