Update for Portfolio Positioning as of 9/21/18

What are "situational risks", a phrase that I frequently use to describe one of the key determining facts that govern asset allocation strategies for each individual. 

College tuition for the kids may be one of those risks since it requires a great deal of after tax money, which can no longer be used to meet other financial requirements. 

Student debt is now a crippling financial factor for many youngsters. The current debt is estimated at approximately $1.5 trillion. 

My parents could afford to pay the tuition bills and all other expenses for their children, but only after my father sold his entire interest in one of his two businesses.  

For those paying tuition now, this snapshot shows what Tulane University collected in 1969 for one semester, my first at that institution: 

It is quaint in a way. For room, food, health insurance and tuition, the grand total was $1,689 or $3,378 all-in for my freshman year. I chose Tulane for two simple reasons. It was located in New Orleans and it was the only University at that time that would allow me to substitute Philosophy for Calculus. I do B.S. better than math. 

The tuition component for one semester in 1969 was $1,054 or $2,108 for one year. If I increased that number by the inflation rate to the present, the tuition would be about $22,154. The actual number now is $52,960. 

Another expense category that has accelerated over my lifetime at a far faster rate than inflation is medical costs broadly defined. 

Fidelity now estimates that a healthy 65 year old couple retiring today at 65 would need $280K over their life expectancy, just for health care costs. That estimate excludes nursing home and caregiver expenses and assumes the continuation of traditional medicare. How to plan for higher health-care costs in retirement; A Couple Retiring in 2018 Would Need an Estimated $280,000 to Cover Health Care Costs in Retirement - Fidelity

When discussing these issues, I have emphasized that a "safe" portfolio of low yielding savings accounts, CDs and treasury bills will preserve capital, but will rarely provide material real total returns and will probably produce most of the time negative real rates of return before taxes. 

For the vast majority of households, those investments are not safe at all since capital is not growing fast enough to meet retirement and other major expenses items. 

Stocks have had a tremendous run since March 2009. 

This 9+ year surge has allowed me to de-risk my portfolio while still maintaining a meaningful stock allocation. 

So far this year, and without totalling up the precise number, I have sold into strength and reduced my stock allocation by somewhere close to $100K. The largest single dispositions involved the Vanguard Equity Income Fund (VEIRX) where I eliminated the remaining shares on 6/28/18: Item # 1

Each individual has to assess their own situational risks and risk tolerances when deciding what to do now. 

What I call market internals are still flashing green. Major indexes are trading above their 200 SMA lines and the various volatility indexes including the VIX are in stable patterns as defined by my Vix Asset Allocation Model. 

Fundamentals in the U.S. economy remain solid. The corporate federal income tax cut is juicing profits and funding increases in stock buybacks and dividends. 

All potential negative events that would change the current rosy outlook, however, are being ignored or dismissed; and none are reflected in current market prices.  

The major potential and easily identifiable risks include a non-temporary rise in interest rates throughout the maturity spectrum, a non-temporary burst in inflation and inflation expectations, the ongoing trade wars remaining unresolved and a possible material slowdown in new single family home construction and automobile purchases. 

I have changed recently my allocation and investment strategy. 

Since it seems more certain now that the FED will hike the FF rate 3 times within the next year, with a certain .25% hike next week and a near certain bump again in December, I am holding onto to some proceeds from maturing CDs and bonds longer than usual given the likely continuation of a persistent rise in short term rates.  

9/28/18 Meeting 100% Probability of a .25% hike

12/19/18 Meeting 87.4% Probability of Another .25% hike

7/31/19 Meeting 77.8% Probability of Another .25% hike 

The probability of a 4th .25 hike by 7/31/19 was at 37.6% yesterday.  

It makes less sense to hold onto proceeds for more than a week or so when paid into my Schwab account since the yield on my sweep account is .22%. 

Countdown to FOMC: CME FedWatch Tool

Over the past few weeks, I have been active each week in the treasury's bill auctions, focusing primarily on 1 and 3 month auctions as I anticipate higher rates when those short maturities are redeemed at par value. 

I have put the kibosh on buying bonds maturing after 2020 and in my Vanguard account, where the money market alternative is now yielding 2.11% and will increase with the FF increases. 

VMMXX - Vanguard Prime Money Market Fund | Vanguard

It is possible that the Bond Ghouls may mount another charge after defending successfully the 3.10% ten year treasury yield. If there is another move back down to 2.8%, I may unload a few more intermediate term corporate bonds as I recently did in the last bond rally and with some gusto during the bond rally last year. 

For stocks, I am slightly weighting new purchases in regional banks and BDCs who have a heavy weighting in floating rate loans tied to a spread over either the 1 or 3 month Libor rates. This is an inconsequential nip and tuck so far. In tandem, I have slightly reduced my equity REIT allocation. 

The move in marijuana stocks lately reminds me too much of the dot-com bubble from the late 1990s. I played an ETF (HMMJ:CA) for some trading gains, as previously noted, but I am staying away now. 

The problem with market timing is that the investor has to be right twice. I have read over the years comments by investors that the market was too high and they were going to wait for a 20%+ decline  to invest. I started to hear those kind of comments in 2010 and with more frequency since 2012. 

The problem with that approach gets back to the situational risks discussed earlier, and the necessity to increase capital far beyond what CDs and savings accounts can produce and have produced for a long time now. 

Looking back, the market could correct 20% from yesterday's close and still be well above where it was on election day. 

SPX Closes 

9/20/18: 2930.75
20% Correction = 2,344,6 
11/8/2016: 2,139.56

This index was around 20 when I was born. 

For youngsters, a low cost ETF fund that owns the total U.S. stock market is a good core holding. Fidelity just started one that has zero expenses and no minimums. FZROX - Fidelity ZERO SM Total Market Index Fund | Fidelity Investments Other sponsors have similar funds with a slight expense ratio. Schwab's mutual fund version is SWTSK which has a .03% expense ratio and a $1 minimum initial investment. Vanguard has a mutual fund and an ETF that track the total U.S. stock market. VTSMX Vanguard Total Stock Market Index Fund; VTI Vanguard Total Stock Market ETF ETF 

I suggested the other day to my youngest nephew, who just started his first year at Northwestern Medical School, to open a position in that Fidelity zero expense total U.S. stock market fund. 

The second piece of advice was to never sell a share, but to increase purchases during the inevitable market meltdowns (45+% loss over a relatively short period), bear markets and corrections. 

The last piece of advice was to reinvest the dividends. 

Planning for events that will happen in 30-60 years is a lot easier than trying to scramble at age 60 or later when the realization finally hits that the nest egg is woefully deficient.  

There will be long and short periods in his life when the market will scare the living daylights out of him. This is really simple plan and requires almost no thought other than to remember that shares can not be sold prior to retirement. 
  
There will be times where blood will flow in the streets. People will be panicking. If all of that is due to a nuclear war, then maybe gold and silver coins and a bunker will be the best option. Otherwise, increase the amount being invested during such periods and resist the urge to flee. 

I will mention starting a position in FZROX in my next blog, though the amount invested was light years below immaterial. It is actually an embarrassing amount. I do not need to grow capital and consequently my risk allocations have been dialed way, way back.