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There Is No Such Thing As A Truly Passive Investor (AllianceBernstein Blog)
Even investors that take a 100% passive approach are making active decisions, writes Patrick Rudden at AllianceBernstein Blog. “Those who go passive know why they’re doing it,” writes Rudden. “Instead of paying active managers to try to select securities to beat a particular index, they have decided to hire managers to track that index. Yet this approach involves several active choices.”
Passive investors make some very active choices he writes. First they decide how to allocate their assets, they they choose the indices they want tracked. Then comes “The important decision about how much to allocate to bonds versus equities is an active choice. And so is the decision about how much to allocate to US versus non-US stocks.”
“…But passive investing may be a misnomer. Asset allocation and index selection are important active decisions. And so is the decision about how a tracking manager will track. So investors should recognise when they are making active decisions that are likely to have a significant impact on their investment outcomes — and think carefully about the choices they make.”
What Investors Can Do When The Market Doesn’t Believe The Fed (BlackRock Blog)
In her semi-annual monetary policy report to Congress, Fed chair Janet Yellen said quantitative easing and pace of monthly asset purchases will depend on jobs and inflation. She also said the Fed will take its time in raising the federal funds rate. While markets have already priced in the end of the QE program, “changes in the Fed Funds rate are another story,” writes Matthew Tucker at BlackRock Blog. “The bottom line, the market expects the Fed to raise short term rates more slowly than the Fed minutes would indicate.”
“This is a fresh reminder that for the near term the Fed and their actions are likely to remain the primary driver of markets, and especially short term interest rates. As we move closer to the first funds hike it is likely that we will see the difference cited above converge. Whether that means the Fed moving more slowly (or more quickly) than they anticipate, or the market expectations backing off is hard to say, but one way or another, we know the market and the Fed will converge.
“Because that adjustment has the potential to be volatile, and because the shorter end of the yield curve will bear the brunt of any increase in volatility, we remain cautious on 2 to 5 year maturities. Interestingly, the longer end of the yield curve may exhibit relatively lower volatility as the market and the Fed square off. While long-term investors should be aware of the potential for interest rate volatility, they should keep in mind that their returns will ultimately be driven more by coupon income and the reinvestment of that income.”
Rich Bernstein at Berstein Advisors was asked what the world’s best investment opportunity was. When Bernstein said it was high-yield municipal bonds the person was visibly disappointed. Bond investors currently prefer investing in Iraq than U.S. municipalities. As of July 23, Republic of Iraq bonds due in January 2028 were yielding 7.08%; high-yield municipal bonds in the U.S. were yielding 9%, or 1.9% more than Iraqi bonds. That spread suggests that Iraq is less likely to default than some U.S. municipalities.
“Everybody thinks every municipality is going bankrupt,” Bernstein said at a recent breakfast attended by Business Insider. “It’s just not true. We’re going through a very normal cycle in municipal finance. An accentuated cycle, admittedly, but a normal cycle.”
There is a lack of dealer liquidity in the municipal market and the overall bond market. Chris Alwine, principal at Vanguard says that following the financial crisis “the regulatory environment got more difficult for the dealers to take risk.” That made the dealers made it difficult for the trading desk to to take on too much risk or make the balance sheet grow.
“So, there’s a few implications of this. The first implication would be that we’re going to see higher price volatility in particular on the downside. So, when yields are rising and prices are falling, that may be sharper than in the past to get to the clearing level because the dealer community won’t buy the bond to position it.
“The second big implication here is that as a fund manager, you need to have an intentional liquidity policy. And at Vanguard, we’ve had a long-standing policy in munis — a market with less liquidity than other fixed income markets — to hold more cash or more high-quality assets that will have liquidity when the environment gets difficult.”
Mary Beth Franklin, contributing editor at InvestmentNews has recently fielded questions on how advisors can estimate social security benefits for divorced clients to plug into their retirement income calculations. “In order to collect Social Security benefits as a divorced spouse, the marriage must have lasted at least 10 years and the client must be at least 62 and unmarried. In addition, the ex-spouse must also be at least 62,” she writes.
“Assuming your client meets the length-of-marriage, age and single-status test, they can collect Social Security benefits as if they were still married. The maximum benefit as a divorced spouse is equal to one-half of the amount the ex-spouse’s can collect at full retirement age; less if collected earlier. And your client may be able to collect spousal benefits even if her ex has not yet collected his — as long as he is old enough to collect and they have been divorced for at least two years.”
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