Return myopia is the fixation on return to the neglect of risk.
A myopic focus on yield is a classic case of focusing on return and neglecting the risk side of the equation.
Showing posts with label high yield. Show all posts
Showing posts with label high yield. Show all posts
Saturday, May 2, 2015
Yield Chasing: There Is No Free Lunch
There is no free lunch.
The temptation to chase higher yielding securities is a ephemera.
Higher yields reflect greater risk. He who neglects that basic signal is subject to the laws of economics.
To the piper a price will be paid.
The temptation to chase higher yielding securities is a ephemera.
Higher yields reflect greater risk. He who neglects that basic signal is subject to the laws of economics.
To the piper a price will be paid.
Tuesday, March 10, 2015
Reaching For Yield
For the past forty years, investors were accustomed to bond yields sufficient to generate enough income to cover the traditional 4% withdrawal rate. With the 30 yr bond trading below 3% and the 10 yr bond trading below 2.5%, this approach has become much harder to achieve in current markets.
Bonds are still a portfolio diversifier, but with in the current low yield environment they offer lower returns and less portfolio protection than they have in the past. As a result, many investors are seeking higher yields elsewhere and in the process are incurring higher risks than what they may have bargained for. Here are the main trade-offs:
Action Effect
Overweight high-yield bonds Increases credit risk/increased volatility
Overweight longer term bonds (extend duration) Increases interest rate risk
Overweight dividend paying stocks Skews exposure to certain sectors
Shift from bonds to dividend paying stocks Increases portfolio's overall volatility and risk
Investors need to keep in mind that concentrating assets in higher yielding investments can lead to increased risk and volatility. These strategies can be damaging to your portfolio's overall health.
An alternative to reaching for yield by moving out on the risk-return spectrum is to take a total return approach (viewing your portfolio from both a capital appreciation and a yield perspective), harvesting capital gains (which incidentally is often more tax efficient than receiving interest income) to make up withdrawal needs.
Bonds are still a portfolio diversifier, but with in the current low yield environment they offer lower returns and less portfolio protection than they have in the past. As a result, many investors are seeking higher yields elsewhere and in the process are incurring higher risks than what they may have bargained for. Here are the main trade-offs:
Action Effect
Overweight high-yield bonds Increases credit risk/increased volatility
Overweight longer term bonds (extend duration) Increases interest rate risk
Overweight dividend paying stocks Skews exposure to certain sectors
Shift from bonds to dividend paying stocks Increases portfolio's overall volatility and risk
Investors need to keep in mind that concentrating assets in higher yielding investments can lead to increased risk and volatility. These strategies can be damaging to your portfolio's overall health.
An alternative to reaching for yield by moving out on the risk-return spectrum is to take a total return approach (viewing your portfolio from both a capital appreciation and a yield perspective), harvesting capital gains (which incidentally is often more tax efficient than receiving interest income) to make up withdrawal needs.
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