December 31, 2016 Old Year

RiskReward Vol. 335
 
THIS IS NOT INVESTMENT OR TAX ADVICE.  IT IS A PERSONAL REFLECTION ON INVESTING.  RELY ON NOTHING STATED HEREIN.

I am at the Denver airport awaiting the arrival of my son in law.  We are headed to the mountains for a few days of skiing.  This will be short.

Eight weeks ago, who predicted that the two major indices would experience double digit returns for the year?  Up to election day, no one.  I repeat no one.  It is this unpredictability which several years ago gave rise to the 60/40 Rule---60% stocks and 40% bonds until retirement and then a reversal of the ratio.  But with only paltry returns available in bonds these past eight years, most investors have abandoned this formula in favor of an all stock portfolio, often indexed.  Those who chose that route have been rewarded handsomely as the Dow Jones Industrial Average has tripled since hitting a trough in March, 2009.

But is this a wise strategy going forward?  Maybe, but not for me.  Predictability is far more important for one who got burned in the DotCom crash and who avoided the 2008-2009 downdraft---mostly by luck.  At age 65, I just cannot stomach another equity roller coaster ride.  That is why, lo these past six years, I have been working on a more predictable strategy.  As explained in the past,  I have come to believe that one can achieve an acceptable return by focusing, singularly, on the yield on the 10Year US Treasury Bond (the nearest to a risk-free investment) and trading or investing in securities that are priced in relation thereto.  My favorite correlates are preferred stocks and preferred stock closed end funds.  This is how the strategy unfolded in the latter half of the year.  The election notwithstanding, it was predictable, as early as this summer, that the yield on the 10Year would increase come December when the Federal Reserve met.  Accordingly, when the yield on the 10Year dropped to near record lows causing those securities correlated thereto to reach near record highs (remember when the yields on bonds and those correlated thereto fall, their prices increase) , I sold, reaped a profit and awaited the re-pricing that inevitably would follow any rate increase.  This gamut was explained at the time I sold back in July.  See Vol. 316 Riskrewardblog .  The anticipated re-pricing occurred in spades as Trump's election combined with the Fed's rate hike caused the yield on the 10Year to spike over 40%.  I then re-entered.  As I now sit,  I will achieve an acceptable (6+%) return if 1) the yield on the 10Year remains in its current range or 2) that rate falls.  I lose only if the yield increases significantly which is unlikely given its recent meteoric rise and the downward pressure from foreign sovereign bonds which I described in Vol. 333. If the yield does begin to increase, I will sell well before experiencing any significant loss.

Sorry this is so dense.  I have little time to edit but wanted to capture my year end thoughts. 

Happy New Year.