Monday, December 1, 2008

THE ELEVATOR GOES DOWN FASTER THAN IT GOES UP/More Grips about Vanguard's Asset Allocation Fund

This was just a nasty day. With the S & P average returning to 816, that is close enough to my 815 pause point to place a hold on common stock purchases at least until I see a close below 815 at which time I will be on pause for the rest of December.  I am doing this out of a rational concern of a major spike down and the ability to buy shares at even cheaper prices than today. Most of this process, and the reasons for it, is discussed in several earlier posts.
Last 2 paragraphs of this post:Trading and Asset Allocation in Stable and Unstable VIX Pattern

Instead, I am focusing on bond purchases now, spending the entire day researching new issues for me, and I come close to buying one before it jumped in price.  

I am totally avoiding any bond ETF that contains junk bonds.  Ishares has one, symbol HYJ.iShares iBoxx $ High Yield Corporate Bond Fund (HYG): Overview  The default rates on these bonds will go up considerably during this recession and the prices for "high yield" bonds have gone to historically high levels compared to treasuries as the prices have plummeted.  The price decline in these securities has been relentless and has accelerated over the past weeks.  At some point, and I suspect that it will be many months away, one of these funds might be worth a nibble as prices for these junk securities continue to erode but the economy starts to come back to life.   A jump in prices for these securities can be anticipated when the economy starts to improve.  Now, for me, it is just something to avoid now and for at least several more months.  As I have said, my very limited and immaterial to me exposure in junk bonds is limited to 2 senior bonds contained in DKR, PIS and PKK (Hertz for DKR and Liberty Media senior debt in PIS and PKK).  I am under water with my Liberty bonds and have a small profit in DKR plus a semi annual interest payment received today on my 100 shares.  ETFs like HYJ are nothing but trades.  It started the year at around 99.5 or 92.69 adjusted for the dividends paid to date.  It is now at 64.2.  It is almost impossible to believe that the Loomis Sayles Retail bond fund is having a similar year.  I will likely start paying some attention to a junk bond ETF during the second half of next year.  Another junk bond ETF, and the only other one on my radar screen, is sponsored by SPDR, symbol JNK.SPDR Lehman High Yield Bond ETF - Fund Detail  It has an expense ratio now of .4 compared to the ishares at .5%.  While it is important for me to pay attention to expense ratios, the movement in a high yield bond ETF will dwarf any difference in expense ratios between these funds.  If I end up buying one or the other next year some time, I will not reinvest the dividends into additional shares, and I seriously doubt that I would hold it for a year.   

Another issue with the Vanguard Asset Allocation fund which has had a 100% allocation to stocks this year, besides bad asset managementVANGUARD ASSET ALLOCATION: IS VANGUARD PROUD? MORE ON VXD, is that it becomes an expensive S & P index fund doing what it has done.  It is investing in the stocks contained in that average and charging more than an index fund for the S & P 500 or an S & P 500 ETF like SPY.  The expense ratio for the Vanguard Asset Allocation fund is .37% for the Investor shares whereas SPY charges .1%. SPDR S&P 500 ETF (SPY), SPTR Fund Detail | SSgA Funds - Fund Detail  I might forgive and forget if Mellon had invested say 20% in either bond or cash at the beginning of the year.  After all, most people know that 100% allocation to stocks at the start of the recession is not a good idea. I would have been very pleased if they had gone to a benchmark 60/40 or a 60/30/10 early in 2008.  I had already gone much further as I explained in a prior post.  A 100/0/0 is just foolish.   The recession started in December 2007MarketWatch  And without a doubt there were numerous signs of an acceleration of the downturn starting this summer which caused me to do even more selling in late summer.  This fund says it wants to beat the S & P 500 with less volatility.  I try to do the same for myself.  I am doing a much better job of it, not only this year but in prior years.  I am not a financial advisor, nor will I ever be one.  I do know enough to watch out below and change my allocations before the bear destroys good chunks of my net worth.      

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