In today’s volatile and low yield environment, many investors are asking questions about topics related to inflation, income and timing the market.
In the second of an ongoing series of posts dedicated to reader questions, I’ve compiled some of these questions posed by readers of my posts, along with my answers. If you have an investing-related question you’d like me to answer real-time, you can do so on June 12th during a live Facebook Q&A session from 10 a.m. until 12 a.m. PST (check out our Facebook page for more information), or post your question in the comments section below.
Q: Regarding my suggestion that real estate isn’t the best inflation fighting investment: Real estate is a much better inflation hedge than you indicate due to inflation increasing the base value of the property, which should be included in your calculation. For example, don’t you agree that triple net REITs will increase in net asset value in an inflationary time period, since while their rents may increase slowly, the properties’ values will increase? The TOTAL return must be considered, not just rents. Seeking Alpha Reader
A: I actually agree as far as physical real estate is concerned. If you own the bricks and mortar variety, as you suggest, real estate has been a good way to hedge against inflation. The record on REITs is more mixed. While rents go up, multiples have often contracted during periods of unexpected inflation. This, at least historically, has made REITs a less effective inflation hedge.
Q: Regarding my post on the “sell in May” myth: Russ, I don’t think sell in May is a myth. Over the last 50-60 years all of the gains were experienced in the Fall/Winter to April time period. You have a loss if you only invested only in the ‘sell’ period. Seeking Alpha reader
A: Very long term return estimates look different. Looking at returns going back to 1896 – more reliable as you have more data points – the seasonal bias is not nearly so clear cut. May and June tend to be weak and September is clearly negative. That said, historically, average returns in July in August are 1.33% and 1.24% respectively.
Q: Regarding my post on opportunities today in fixed income: I agree on mildly adding risk versus duration, however I find the whole concept of “Spread to Treasuries” to be uninformative at the present because of artificial suppression of the Treasury yield curve. What are the relative spreads among corporates for BBB+, AAA and junk compared to historic norms? Seeking Alpha Reader
A: While I would agree that today’s large spreads are mostly driven by Treasuries being artificially expensive, rather than investment grade being particularly cheap, negative real yields in the Treasury market still argue for underweighting Treasuries and raising allocations to other sectors, like investment grade. In terms of the relative attractiveness of investment grade to high yield, spreads are well below their long-term average. Currently, high yield is only yielding about 200 basis points over BBB, well below the 25-year average of 310 bps.
Q: Regarding my recent Market Perspectives piece on navigating fixed income investing in a low yield world: Why should bonds be a significant portion of investors’ portfolios? Seeking Alpha Readers
A: While I agree that bonds look very expensive relative to equities, bonds are inherently less volatile than stocks. And while stocks are arguably the better value, few investors are likely to accept the volatility that would accompany an all equity portfolio. This is why I expect that most investors will maintain some significant allocation to fixed income. My view is that investors should raise their equity allocation and lower their fixed-income allocation relative to whichever benchmark they follow.
Russ Koesterich, CFA is the iShares Global Chief Investment Strategist and a regular contributor to the iShares Blog. You can find more of his posts here.
Source: Bloomberg
Note: Some questions have been edited for readability.
Bonds and bond funds will decrease in value as interest rates rise. Past performance does not guarantee future results.
