First up;
The Net Worthwhile blog had a post about how people approach and then live through their retirement. I thought the following passage was fantastic.
Boomers, on the other hand, made outearning their parents the goal (which they achieved), but too many cornered themselves into jobs they didn’t love in pursuit of a utopian retirement that often didn’t materialize.
Gen X mostly followed that plan, but younger generations have a more morbid view of retirement and are asking more of their work. Money isn’t meaningful enough for them.
Morbid view of retirement? Yikes. I can understand the idea that views about retirement are changing over concerns about the system being likely to change causing the fear that things like Social Security might change meaningfully in the next decade or two and that AI or quantum may negatively impact career trajectory. I certainly don't know what the outcome will be but anyone worried about this needs to start crafting their own solution right now.
Another box spread fund is coming.
I'm a believer in the concept and own BOXX for clients. It's not a source of outsized "yield," it's more of a T-bill like return stream. The prospectus for XBOX says it will use broad based indexes and also ETFs. We'll see what that looks like in practice and whether it will really use ETF and whether it might differentiate from BOXX.
Barron's profiled the PIMCO Multi Sector Bond Active ETF (PYLD) which is two and half years old. It has a "6% yield without much risk." Looking at the holdings, there is a lot of mortgage debt in there currently with some very long maturity dates. The PIMCO page for the fund says the effective duration is 4.48 years despite the largest holding at 16% of the fund maturing in 2054 and a lot of other holdings of a similar maturity.
Duration of mortgages tend to shorten up considerably when rates go down because people refinance but when rates go up, duration lengthens because no one with a 5% mortgage will refinance when rates go up to 6%. The jargon for that point is convexity. PYLD is actively managed so it might look completely different if/when rates move higher but for a little mortgage backed context, MBB and VFIIX were each down mid teens at their lowest in 2022.
Here's a quick comparison.
Clearly, PYLD knows what it's doing but buying a fund like this one is betting that they will continue to get it right. If risk happens fast starting on Monday, then PYLD could get hit very hard if it didn't quickly rearrange its interest rate risk. Scanning the full holdings, there are three or four very small positions out of about 500 that might be hedging interest rates but I am not sure.
Portfolio 3 entirely avoids interest rate risk or maybe more correctly, having to be right about interest rates. Avoiding very low rates that don't adequately compensate the risk taken or accepting 7% for ten years because you think it does adequately compensate risk taken are not about trying to predict interest rates. The compensation is worth the risk or it isn't. That's a different thing.
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2 comments:
Gen X (where I lived) grew up in times of hardship and there wasn't much money around in the 70s for most, but there was the common knowledge that if you put your head down and worked hard you could afford a home and a family - especially when society changed to having two breadwinners in a household. Younger people - what with AI threatening to take many of the better-paid jobs, a cost of living crisis, and a housing crisis - don't seem to have that innate optimism.
Many young people in the west will need to change their aspirations to seeing renting a home as giving the benefit of mobility in better jobs' markets and retirement locations. They'll have to still save in and outside of SS, for leaner times and retirement, as they won't benefit from HPIs.
Governments will have to change policy, to make more work suitable for older workers possibly in insecure housing and with imperfect health. I'd like to see new legislation, which gives tax breaks to companies that have older workers taking up above a set percentage of total worker numbers. Companies would be in competition to make those roles suitable for older workers' needs, shareholders would see how it affects their bottom line (and gives them a little healthy glow of satisfaction) and demand the necessary adjustments, and CEOs would make it a priority or the company would find a new one. Boomers would get another life / social benefit, so there would likely be little pushback.
I don't plan on waiting for the government to figure anything out. We are so dysfunctional, it is hard to see how it gets fixed.
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