Why I am not changing my portfolio even though the yield curve has inverted

On Friday it was reported that the yield curve in the US inverted for the first time since the last (great) recession. This is supposed to be a reliable harbinger for a future recession in 12-18 months.

What does it mean when the yield curve inverts?

It means the US short-term interest rate (as measured by the 3 month Treasury Bill rate) is now higher than the long-term interest rate (as measured by the 10 year Treasury Bill rate). An inversion like this is generally regard as a negative market/economic sentiment that can affect economic and market behaviour.

The yield curve inversion has sent some scurrying to make changes to their portfolios by raising cash, selling riskier stocks and becoming more defensive (buying utilities, telcos, REITS and consumer staples equities).

Why I am not scurrying to do anything on the news:

  1. I already have some cash (about 10% of my portfolio, including high-interest savings and short-duration bonds maturing later this year)
  2. I already have good exposure to defensive equities: ~18% utilities + ~11% consumer defensive + ~6.5% communications services + ~3.5% real estate = ~39.0% defensive
  3. I have less than 50% of our total portfolio in equities so a market downturn should be offset somewhat by non-correlated holdings in fixed income, cash and bullion (this was true in 2018, when my portfolio returned ~+1% in spite of equity drawdowns in Canada and the US)
  4. If I sell something to raise cash there could be tax consequences in our non-registered accounts, due to potential capital gains being taxed
  5. I don’t know which non-defensive equities to sell to raise cash – I like all my holdings for the long haul or I wouldn’t own them
  6. Recessions tend to be short and I believe my long-term portfolio is structured well for riding out short-term events
  7. An inverted yield curve has reportedly accurately predicted upcoming recessions eight times (by some sources) since 1968 but, if on January 1, 1968, I bought and held the S&P 500 (^SPX) I would have made a return of 2.81K% in spite of the eight recessions (including the Great Recession of 2008-09)
  8. According to Forbes, the chance of a recession in the next year is always about 27% (based on their data pointing to 16 recessions since 1960) and today the chance is 30%, hardly more than average
  9. If the chance of recession is 30% next year there is also a 70% chance there won’t be a recession next year which means, based on probabilities alone, I should be buying risk-on stocks
  10. If the US Fed surprises by lowering interest rates, that could change the situation immediately
  11. I don’t know how to time when to start re-buying the risk-on equities I am supposed to sell now – presumably when the yield curve corrects to non-inversion

I am not saying a recession won’t happen in 2019-20. It may well.

What I am saying, as a long-term investor who buys, holds and monitors a portfolio of retirement assets designed for all markets, who relies primarily on asset allocation rules when making security weighting decisions, and who makes limited and selective trades intended to improve overall portfolio quality, I don’t react to news like this.

Do you?

 

 

 

My annual portfolio review and updated household investment plan are now posted

I’ve posted my annual portfolio review as well as an updated version of my household investment plan.

My annual review shows a small gain in our portfolio for 2018, well ahead of major North American indexes. More here.

The updates to my household investment plan feature continued focus on sequence of returns risk and asset allocations based on “buckets” along with a reduction in our target portfolio performance going forward as we start to glide into retirement. More here.

OSC Executive Member Brad has updated the Steven Brown Retirement Forecaster tool

Brad has made some updates to Steven Brown’s Retirement Forecaster Excel spreadsheet tool (version  2.7.3).

The changes he’s made are improved accuracy with the calculations for CPP Survivor Benefits and CPP Death Benefit.

See Brad’s member page here for more..

More on sequence of returns risk

Sequence (of returns) risk is something I mentioned in my recent piece about my upcoming third quarter portfolio review. Sequence risk is a major factor in my planning as our household heads into retirement in the near future.

Looking at the current valuation of the S&P 500 vs. underlying gross national product is a bit sobering.

More on this here.

Previewing my next quarterly household portfolio review

September brings my next quarterly portfolio review and my next, self-imposed, securities trading window (I only trade four times a year). I have been giving a fair bit of thought this summer to what’s next for our portfolio.

Here’s a preview of my thinking….

 

 

 

 

 

My Q2 2018 portfolio review has been published

I’ve published my second quarter of 2018 portfolio review. In it I discuss my current take on managing our household portfolio, some of the trades I’ve recently made and my thoughts for the rest of the year.

See my review here.

Brad’s updates to Steven Brown’s retirement forecaster tool are now available

Brad updated Steven Brown’s Retirement Forecaster Excel spreadsheet tool (version  2.7.2). The changes are as follows:

Version 2.7.2 provides support for defined benefit (DB) pension plans with a Bridge Benefit (such as the Fed Government or Ontario Teachers) and the accompanying DB Survivor pension. Detailed input instructions are provided on the Instructions sheet, under the Instructions section.

You may access the material on Brad’s page here.

My 2018 first quarter portfolio review is now published

I’ve completed my first quarter portfolio review.

Quite a difference from last year so far. Our household portfolio is flat so far this year. That’s a bit better than some of the major indexes, but not all.

I have a link in my review to some evidence that markets in the US might be soft until the mid-terms, and then could rebound a lot. So hopefully things will improve as the year progresses.

Find out more here.