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Offset calendar year volatility of S & P 500 with an income fund

Offset calendar year volatility of S & P 500 with an income fund

| June 11, 2020

Executive Summary

Owning both stocks and bonds might be an appropriate strategy for a retiree or "pre-retiree" to avoid a potential very large loss of just stocks and hopefully to generate some ongoing income.

Disclosure:  As also mentioned in referenced materials linked or attached:

  • Past performance does not guarantee future results.
  • All investing involves risk including the possible loss of principal

Investor education not recommendation

  • If investing were easy, everyone would be "comfortable."
  • Specific ideas are mentioned in this post.
  • For many (including me) concrete specific examples might help to understand complex concepts.
  • Nothing in this post is a recommendation
  • I happily will discuss your situation with you.
  • I might (or might not) make specific recommendations.
  • But only after I understand your specifics.

Primary Audience for this post:

  1. Within 5 years of retirement or already retired.
  2. Currently very low interest rates increases the challenge of finding appropriate fixed income
  3. Diversification can be helpful when S & P 500 has a low or down calendar year. 
  4. Protection of your nest egg is still critical.

What Is Diversification?

"Diversification is a risk management strategy that mixes a wide variety of investments within a portfolio. A diversified portfolio contains a mix of distinct asset types and investment vehicles in an attempt at limiting exposure to any single asset or risk. The rationale behind this technique is that a portfolio constructed of different kinds of assets will, on average, yield higher long-term returns and lower the risk of any individual holding or security."

Source Investopedia

What Is Correlation?

Correlation, in the finance and investment industries, is a statistic that measures the degree to which two securities move in relation to each other. Correlations are used in advanced portfolio management, computed as the correlation coefficient, which has a value that must fall between -1.0 and +1.0.

Source Investopedia

Bruce's additional details:

If two items are moving in opposite directions consistently, one is up, the other down, wash-rinse-repeat, such a pattern is not a low correlation. That pattern would be a strong negative correlation, e.g (-.90)

A low correlation would be a very small or indiscernible pattern, more like random.

The two items shown in this post were selected because their correlation appears to be low.

Diversification is more complex .... 


PIMCO Income Fund calendar years from image above:



SOURCE: PIMCO Income Fund Card March 31, 2020

=     =     =     =     

Vanguard S & P 500 Index Fund calendar years from image below:



Source: Vanguard


Stock Index Funds have recently provided good growth ..


Source: Vanguard

But Index Funds must stay fully invested and, sadly, stocks are subject to Market Loss ("Drawdown")

"More importantly though, while all the crashes prior to today have their respective bottoms marked with red, we have no clue whether we are anywhere near the bottom for the coronavirus crash."    Source: Of Dollars and Data

Advantages & Disadvantages:

"Diversification Means Everything Is Not All Moving In the Same Direction at the Same Time"

This concept is of critical importance for retirees and pre-retirees. Many simply would be in big financial trouble if everything they owned went down all at once. For example

Per the PIMCO Prospectus:
"The Fund seeks to achieve its investment objectives by investing under normal circumstances at least 65% of its total assets in a multi-sector
portfolio of Fixed Income Instruments.  (Prospectus Page 17)

Bruce's Commentary:  The Vanguard S & P 500 will hold, by definition and investment objective, the 500~ (or so) stocks in that index, the PIMCO Income Fund will hold about 65% Fixed Income items. So the holdings or components of these two items are VERY different. Such difference does not "guarantee" that the two items will perform differently. But some of the time, as shown above, they have.

What to do? Diversification Example:

  1. Social Security and / or Pension and / or annuity for predictable monthly cash flow.
  2. Stock index for some of the highest potential growth.
  3. One or more active management strategies to participate in stock market gains while potentially having smaller capital losses.
  4. Fixed Income of probably more than one "flavor" to generate additional income with, typically, less downside risk than stocks.

The views stated in this letter are not necessarily the opinion of Cetera Advisors LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Investors should consider their financial ability to continue to purchase through periods of low price levels. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. Exchange traded funds (ETFs) and mutual funds are sold only by prospectus. Investing in ETFs and mutual funds is subject to risk and potential loss of principal. ETFs incur trading and commission costs similar to stocks and frequent trading can negate the lower cost structure of an ETF. There is no assurance or certainty that any investment or strategy will be successful in meeting its objectives. Investors should consider the investment objectives, risks and charges, and expenses of the fund carefully before investing. The prospectus contains this and other important information about the fund. Contact your registered representative of the issuing company to obtain a prospectus, which should be read carefully before investing or sending money. The return and principal value of fixed income securities fluctuate with changes in market conditions. If bonds are not held to maturity, they may be worth more or less than their original value. All investing involves risk, including the possible loss of principal.  There is no assurance that any investment strategy will be successful. Guarantees are based on the claims paying ability of the issuer.

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