Personal Finance Financial Planning & Investing

UAH

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Anyone have any experience with Leveraged Loan Bonds? What sort of return are you getting?
I have owned various leveraged closed end bond funds for over twenty years. When the investor is on the right side of interest rates and exchange rates they can be a powerful income generator but when the Fed and Treasury are working against bond holders the way they have since 2008 they become liabilities to a portfolio.

In terms of leverage many of the funds I have invested in use leverage in the form of selling Preferred Shares that amount to 30% of the NAV of the closed end offering. I have never viewed this as having high risk to the common share holders in a well managed fund.

In 2003-2004 I purchased four leveraged tax exempt national muni funds in my wife's taxable account. A couple of those have cashed out and two others have been held through the great recession and have paid out around 6% per year post tax.

Have been watching the muni market over the past several years and following their recent decline purchased two leveraged tax exempt Black Rock funds this week. Time will tell how they perform in a period of rising interest rates.
 

BamaNation

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Great article, 4Q!

I'm going to confess to a faux pas from yesterday that never should have happened...and I hope y'all learn from my costly mistake. I wasn't really trying to market time but I ended up doing something similarly stupid.

We were in a position to do a fairly significant (to us) tax loss harvesting (TLH) in our brokerage account because of how much it appeared the market index would be down before the opening yesterday morning.

In case you don't know, when you TLH, the idea is that you sell a stock or fund to take the loss which can then be used to offset realized gains when you're preparing your taxes. There are some nuances (like don't do wash sales) but swapping one fund for another and harvesting the loss is the overall intent. You sell what you have at a loss and then IMMEDIATELY buy something that is not substantially similar with the funds you now have from selling at a loss. Again, done properly, you're effectively just swapping out one fund for another and are not out anything and you have TLH'd the loss to use at next year's tax filing.

Well, I was seeing what was happening pre-market (markets down 2-3%) and told myself, "Self, today is a great day for TLH'ing!" (My wife and I had even discussed the possibility the night before). So, pre-market, I created a transaction to sell all VTI (Vangard Total Market Index ETF). My thinking was that I would then create the buy-side transaction of nother total market index - one that's not substantially similar*** and uses a slightly different base index (we have a list of "pairs" or fund substitutes like this that we use) immediately after seeing the funds were available to use. What I failed to even think about was that I am in Utah, market opens at 7:30am MST and I would be transporting kids to school at that time. It was about 10 degrees outside and snowing so maybe my brain was frozen.

By the time I got back home at 815am MST and was able to do the buy, I had just locked in a 1.5% loss.

Dumb Dumb Dumb (x1000). Something I KNEW not to do and did it anyway. I broke two of my own rules: don't do this in the first or last hour of trading day and don't allow time to pass between transactions.

There's always a chance that you lose a little bit if the market is moving fast but if you sell and then a few minutes later buy it most likely won't be very much. Yet, there was a 45 minute gap for me.

But, as I sheepishly texted my wife in the post mortem: "Lessons Learned" (and then she made me tell her what lessons I had learned :D )

Anyway, as part of my penance, I shared this with y'all.



An example of how it should work:

Let's say you own 250 shares of VOO (Vanguard S&P 500 Index) which you bought in June 2021 at $400 for a total cost of $100,000. The S&P falls 10% and VOO is now $360/share and your market value is $90,000 so you have an unrealized loss of $10,000.

You decide to TLH. So, you sell all 250 shares of VOO and have $90K "cash" in your account. As soon as possible (minutes later) you would buy something similar ... but not substantially similar (Maybe VTI - Vanguard Total Market Index) at the market price for however many shares you can buy with $90K. You now have $10K to use to offset gains and VTI and VOO move very similarly so whatever happens.

The key to it all is to not allow any time to pass between transactions (other than getting the confirm that the funds from the sell are now available to use and that usually happens really quickly (a few seconds to 2-3 minutes). Don't market time regardless of what you think the market is doing and don't allow the gap of time.


*** There is some debate about
what substantially similar means. You definitely couldn't sell VOO (an ETF) and then buy VTIAX (the exact equivalent in a mutual fund) or vice versa within a 30 day period on either side of the sell. Or you couldn't sell Berkshire B and buy Berkshire A. Doing so would create a wash sale. We track which underlying stocks are being used in our pairs and the base index the fund uses for tracking. If they use the same base index, that would be a really good case for being substantially similar. YMMV and make sure you do your own research on this. IRAs/401ks can't do this but transactions in these accounts (like automatically weekly/monthly investing or re-investing dividends) can create wash sales that nullify the TLH so be careful! Caveat emptor!
 
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92tide

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my wife and i both just bought the max amount of i-series bonds. they are now at 9.6 pct. after i got my new job, we peeled off some of our oh [crap] fund we've built up. thankfully, the job search went quickly and smoothly enough that we didn't have to dip into that fund.
 
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4Q Basket Case

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Morningstar article on the current volatility. Might require signing up for a free trial, but worth the trouble if you’re having some anxiety.


Key point in the article: Keep Calm and Carry On.

The article keys on something that is incredibly true, but bears repeating: The markets don’t like bad news, but they can handle it. What they can’t handle is uncertainty, and that’s what’s driving a lot of the volatility you see today.

Also, while it makes several subordinate points around this, I don’t think talks enough about the importance of a down market to younger investors.

For younger investors — defined as anyone under 50: When you’re about to retire and looking back over your investing career, you’ll find that markets like this are where you really make hay. Keep putting money into that 401k every paycheck, even when the day’s news is grim and all the talking heads are screaming. You’re buying cheap now, and will reap great returns, provided you put cotton in your ears and just keep on keeping on.

For retired investors, or those with less than a business cycle until retirement, this is a reminder of the value of diversification. Never have too many eggs in one basket. Have Growth, Blend and Value funds. Have some cash. Be aware of the vulnerability of long-term bonds to even relatively small increases in long-term interest rates. Don’t buy stuff you don’t understand — for me, that‘s crypto currencies and NFTs.

I’ve confessed here to making a fear-based decision at the beginning of the pandemic. I can’t un-do that, but I can learn from it, and not repeat the mistake. I’m in for the long haul. When the Fed stops raising interest rates, I’ll look at my portfolio and re-balance. But in the meantime, I won’t get out.

As the article states, taking a year-long hiatus from the financial news isn’t a bad idea, so long as you keep on keeping on.
 
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4Q Basket Case

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A good article from Morningstar on the odds of a recession in the next year. Bottom line: Morningstar says the odds are against it, though materially above zero. Also points out that all recessions are not created equal, and even if one does occur, that doesn't mean it's a repeat of 2008-10.

Here's the end quote:
We see very little reason to think a repeat of the severe, long-lasting Great Recession would occur. This event still looms large in the psychology of investors. But we shouldn’t take the Great Recession to be a template for every recession. Many post-WW II U.S. recessions were accompanied by very temporary impacts to economic activity and asset prices.

Here's the full article:
Is a Recession Likely? (And How Much Does It Matter?) | Morningstar

Bottom Line for investors with more than 10 years to retirement: Keep calm and carry on. Recessions are where you really make long-term bank.
 
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BamaNation

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A good article from Morningstar on the odds of a recession in the next year. Bottom line: Morningstar says the odds are against it, though materially above zero. Also points out that all recessions are not created equal, and even if one does occur, that doesn't mean it's a repeat of 2008-10.

Here's the end quote:
We see very little reason to think a repeat of the severe, long-lasting Great Recession would occur. This event still looms large in the psychology of investors. But we shouldn’t take the Great Recession to be a template for every recession. Many post-WW II U.S. recessions were accompanied by very temporary impacts to economic activity and asset prices.

Here's the full article:
Is a Recession Likely? (And How Much Does It Matter?) | Morningstar

Bottom Line for investors with more than 10 years to retirement: Keep calm and carry on. Recessions are where you really make long-term bank.
Good article!

One thing to think about also is the recent tanking of bonds. Good opportunity to Tax-loss harvest if you have them in a taxable brokerage account but if you TLH then you need to immediately re-invest in something similar or put in a CD for a month then re-invest back into BND/VBTLX. The other option is to just keep on keeping on and continue to invest in bonds if your investment horizon is 7+ years b/c the average duration of total bond index is about 7 years so the portfolio will continue to roll over and capture the higher interest bonds as interest goes up in near term even if you're currently under water on paper. However, there are plenty who would say buy shorter (1-3 yr) bonds because of the yield curve being flat now so don't take longer term risk on fixed income. YMMV.
 
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Padreruf

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Good article!

One thing to think about also is the recent tanking of bonds. Good opportunity to Tax-loss harvest if you have them in a taxable brokerage account but if you TLH then you need to immediately re-invest in something similar or put in a CD for a month then re-invest back into BND/VBTLX. The other option is to just keep on keeping on and continue to invest in bonds if your investment horizon is 7+ years b/c the average duration of total bond index is about 7 years so the portfolio will continue to roll over and capture the higher interest bonds as interest goes up in near term even if you're currently under water on paper. However, there are plenty who would say buy shorter (1-3 yr) bonds because of the yield curve being flat now so don't take longer term risk on fixed income. YMMV.
That's exactly what my 403b manager said to me yesterday...bonds are down...but they will come back and you at least have par for them if you hold them.
 

UAH

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Attended a Quarterly Investment Review this week and picked out a couple of charts that others may be interesting in. The GMO projection is for seven years. The second chart is a Goldman chart projecting median P/E multiples during recession. This would imply that if the US enters an average recession the S&P 500 has a potential decline ahead of 15.1% from here.

Equity Performance Projections.PNG
Projection of S&P PE multiples in recession.JPG
 
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BamaNation

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Attended a Quarterly Investment Review this week and picked out a couple of charts that others may be interesting in. The GMO projection is for seven years. The second chart is a Goldman chart projecting median P/E multiples during recession. This would imply that if the US enters an average recession the S&P 500 has a potential decline ahead of 15.1% from here.
UAH - Thanks for sharing.

Do you have the assumptions they're using to come up with these projections and P/E multiples? Also, now that "recession" is being redefined to something other than its historical meaning, I guess it depends on whether we're actually in recession that started in Q1 or not? Just curious because I'm seeing so many different projections across the board with all manner of assumptions.

Also, I think there are so many factors at play right now (Fed schizophrenia, inflation, covid 19 / other viruses, willful unemployment, supply chain discombobulation, crypto, political divisiveness, outrageous spending, long term debt, deficit, international conflicts, Chinese & Russian & Iranian hegemony, etc.) that making any meaningful predictions is incredibly difficult. It's like 14-D Chess :D

As an aside...

Given this market volatility and unknowable unknowingness... we continue to "Stay the course" for the long term on our 3-fund portfolio recognizing that 'Nobody knows nothing' and projections tend to be all over the place. BTW, doing this and not using an "advisor" means our portfolio expense ratio is currently around 0.04%. You get what you don't pay for (see below). We haven't withdrawn or moved anything anywhere other than to do some rebalancing back to our 75/25 targets.

It's been a tough year, but if I was chasing returns, I would have been a nervous wreck. Instead, while I track how our portfolio is performing month to month (to make sure there have been no hacks or mistakes) and from an "isn't this interesting" and "man, I wish we weren't down 20% (and now up >8% for month of July) but at least we're continuing to invest at lower prices" view, we haven't worried about it. It's a freeing exercise.


Image

Source: Vanguard
 
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