Portfolio Allocation and Management as of 1/11/19

Last Year was forgettable as both bonds and stocks, using broad ETFs to measure performance, produced negative total returns unadjusted for inflation and taxes. 

S&P 500 ETF (SPY) 2018 Total Return = -4.56%

Vanguard Total Bond Market Index Fund ETF Shares (BND) Total Return = -.11%

A post-Christmas stock market rally significantly improved the total return compared to SPY's performance through Christmas Eve.  

The adjustment for inflation, using all items CPI for 2018, would reduce those numbers by 1.9% and by 2.2% using the core CPI number. Consumer Price Index Summary

The tax adjustment would depend on whether the assets are held in taxable or non-taxable accounts and the taxpayer's tax bracket. 

The name of the game is "after tax, inflation adjusted total return." 

The inflation rate adjustment will depend on an individual's personal CPI rate which could be higher or lower than the BLS numbers.  

My personal inflation rate declined after I transitioned to Medicare and a Blue Cross of Tennessee Medigap policy for health insurance from the Obamacare Bronze Plan. Certain major components are not applicable to me, while others are lower and none are probably higher. Overall, my personal inflation rate would be somewhere in the zero to .5% range.  

The fast decline in the stock market did allow me to increase my positions in dividend paying stocks at higher yields. The overall percentage allocation to stocks increased by about 1% from 10% to 11% of my brokerage account assets as I previously discussed: Stocks, Bonds & Politics: Update for Portfolio Management as of 12/28/18

I have discussed some of those dividend stock purchases in recent posts and will continue discussing several of them made over the past 30 days throughout January. I am running behind on discussing stock purchases and dispositions.  

I would describe my current stock strategy as selling the rips and buying the dips with a focus on dividend paying stocks. 

At the current time, I am expecting that the S & P 500 will run into overhead resistance near 2,632, a major support line pierced with much gusto in early December. 

The overall main emphasis continues to be on capital preservation plus income generation primarily through investment grade bonds. The longer end of the maturity spectrum is concentrated in high quality Tennessee municipal bonds. The overall weighting remains in zero to 3 year maturities.    

To highlight this conservative asset allocation approach, I took the following asset allocation snapshot of a Fidelity account, the largest of seven:

This snapshot shows that the bond allocation is investment grade and weighted in short term maturities: 

Fidelity's calculations are mostly accurate, but I would quibble with some classifications. 

Among the stock positions, for example, Fidelity includes equity preferred stocks which I would include in the bond classification, or as a separate class. I would not classify those securities, which do not represent an ownership interest in the businesses, in the same category as common stocks. 

Oddly, some exchange traded bonds that I own in this account are included in the "preferred stock" category and consequently part of my "stock" holdings. In this account, the exchange traded first mortgage bonds and the junior bond THGA are classified as "stocks".  

Another asset class, included in the stock category, are bond CEFs like GDO and BTZ which I currently own in this account. 

In short, I own less than 9% in common stocks in this account, probably closer to 6% to 7% without totaling up the numbers and just eyeballing them. 

I am keeping the MM allocation in this account around $1K to $3K. That may increase when and if the the MM yield becomes higher than the yield from short term treasuries, or I run out of options for risk assets purchases.   

As bonds and CDs mature, I will buy more of the same, though some of those proceeds may be directed to common and preferred stocks depending on valuations, yields and my opinions about the risk/reward balance. 

Last month, I shifted more of the redemption proceeds to common and preferred stocks due to their price declines. 

Bonds and CDs became less attractive due to their falling yields, though yields have risen slightly this year through yesterday: 

Yields are falling today:

U.S. 10 Year Treasury Note = 2.693% -.054% as of 11:19 E.S.T on 11/11/19

From my risk/reward perspective, both bonds and stocks have become less attractive over the past several days. 

I am still able to find pockets of relative valuation and yield. 

Yesterday, I had 2 Total Capital bonds mature: 

As I mentioned previously, this Aa3 rated bond never traded below 99 since its issuance in 2014, which did not keep Fidelity's third party bond pricing service from valuing this bond at less than 94 last month (pricing is at 1/10th of the $1000 par value):

   

If I could have bought that bond at 93.88 last month, all of my available capital would have been deployed at that price. I could have sold the two bonds at that time near 100, but why do so when I would receive 100 without paying a commission in a few more days. 

I had bought this bond on 5/2/18 at a total cost per bond of 99.874: Item # 2.B. The YTM at that price was 2.295%.

After looking at securities to redeploy those proceeds this morning, I elected to buy 2 Abbott Laboratories 2.8% senior unsecured bonds maturing on 9/15/2020 at a total cost of 99.5 (purchased at 99.4). Bond Detail The YTM at that TC number is 3.171%, but the bond rating is lower at Baa1. Since I am not currently concerned about Abbott's ability to pay interest and the principal amount at maturity,  the difference in ratings was not relevant for me. 

Another reason for buying the ABT bond is that I did not own any of their bonds. Diversification among issuers and sectors is part of my bond allocation strategy. 

And, I recently had 2 Abbott 2% bonds maturing on 3/15/20 redeemed early at par value plus accrued interest:

ROTH IRA 

Item # 2.D.

I lost 4 ABT bonds last year at maturity.  

I also looked at the comparable maturity treasury yield: 

I could have bought two 1.375% coupon treasuries with a 2.536% YTM and a much lower current yield compared to this Abbott bond. Some investors may prefer to accept the lower yield in exchange for perceived safety and the comparative impact of state income taxes. States are not allowed to tax payments made by the U.S. treasury.  

Those are not issues for me so I went with the higher yield ABT bonds. A .6% differential in yields is not material when looking at a 2 bond purchase. It becomes relevant when looking at $2M at .6% or $12,000 per year. 

So that summarizes major points in my thought process for that $2K in proceeds received yesterday.

Next week, I will have $21K in proceeds to redeploy. So that will involve a variety of decisions. If I can not comfortably reallocate to a "risk" asset, then the balance would be kept in the Fidelity Government MM fund for future redeployment.