Transcript:
Easan Arulanantham:
In previous downturns, bonds and TIPS (treasury inflation protected securities) have been used as parachutes. But this year bonds have performed terribly just here today, you know, why is that? And should I have a different parachute for this downturn?
Tom Vaughan:
Yeah, if we look back, you know that these are kind of these rolling downturns. So 2000 2008. And now 2022. Okay, those are the big ones that we’re looking at where they’re, you know, we had 2018, drop kind of a V and came right back 2020 Drop those a little bit different. So in these rolling downturns in 2000, lawns went up, they did really well, great parachute. As far as that goes, 2008, they actually originally fell, because the problem was covering these insurance policies sitting on top of these mortgage bonds, people were selling everything to do that. But once rates started to decrease in that environment, bonds came back up and became okay, parachute in 2008, this one’s different. Because of the raising of interest rates, that’s such an aggressive, you know, pace, you end up with a situation where the bond market is going to fall in that environment, because that’s how it works. Bonds readjust their, their rate of payment by falling in value. So a bond used to pay to and now it should be paying for the value will fall. So now it’s paying for I mean, that’s kind of how it works and the simple terms. And obviously, it’s a very difficult environment for stocks, just because again, first of all, bonds are now paying more, so you can take less risk and buy a bond. And so that takes money away. And then secondly, it makes it more difficult in this higher inflationary environment for companies to have consistent earnings, because you’re pressing on all of their expenses on the upside. And maybe they can only raise their prices so much before they start having a compression of their earnings. Right. So that’s what’s happening here.
I do have something to show you for this question. It’s kind of interesting. And you can see, you know, where some of the potential parachutes are. Now, a parachute is designed to slow your descent, right? So anything that makes no more money or loses less money, then the stock market is a parachute. Right? So even though the bond market’s terrible, and it really is, its historic, it’s still better than the stock market in general. So this is the Vanguard Total Stock Market Index, ETF, it’s essentially the entire US market, I believe it’s about 98% of the stocks that are out there. It’s over 4000 stocks, it was down looks like 16.1%. So far this year. Okay, got down lower than that, that bottom point in June. But that’s where it is now. And so let’s look at some of the other things that would be traditional parachutes. And how did they do? So the first thing you look at here is the Vanguard Total bond market index. Alright, that chart looks pretty bad. But it’s down 1211 and a half percent. Okay, so not good. I mean, it didn’t go up like it did in 2000. It didn’t eventually go up like it did in 2008. And it is down quite a bit. And so that’s kind of a problem. But still, it’s a parachute.
If you had 100% VTI versus say, half and half, you’re better off with half of this. This is BND, right, the ticker symbol Vanguard Total bond market, index ETF and, but it’s not a great parachute, but it’s still somewhat of a parachute, just falling last. So then there’s some other you know, traditional standpoints, this is gold. So gold is kind of designed theoretically, on investment standpoint, we’ve all heard this over and over again, this is the environment we got high inflation, we got the situation. And you can see it ran up actually, this is all year to date had a big run up, but it’s now down 7%, better parachutes and bonds. But the volatility is a lot higher, right. I mean, it was up a lot more and you know, come down and so, but gold is an okay, parachute in this environment, we don’t use it because for the long term, it’s just such a volatile asset. And we try to stay away from some of those in the construction of our portfolios. You know, we’re trying to find some more consistency, but gold would be a parachute that that did, okay. And then this is the short term. Treasury Inflation, protection security. So what happens here is first of all, short term just means in this case, zero to five years. This is the iShares zero to five years. Tip, Bond ETF s tip is the ticker symbol. You can see it’s all over the place. Looks like an EKG machine, but it’s only down 1.8%.
Easan Arulanantham:
Yeah, but if you actually looked at this I just the pricing, it’d be down 6% So the yield has come up kind of to adjust for that. And so we’re looking at the total return. So if you’re just looking at this as a purely as a, you know, a hold on your price has gone down, you lost 6% on it.
Tom Vaughan:
Yeah, but that’s the, that’s the thing that these are supposed to do a little bit like gold, they’re meant for this timeframe, because they do adjust their yield as they go as interest as inflation comes up. And so that has helped, I mean, it’s down last when you look at both the dividend and the price, and you know, or the, or the interest and the price, but still not as expected, that should probably be above zero, you know, or at least at zero or something, you know, some type of scenario, again, this has been just such a brutal rate increase so fast, that it’s created, you know, more problems for that. But again, still a parachute we have this is, I think, our top three or top five holdings in this, you know, so it’s nothing to be super proud about, but it’s better than some of the other things that are out there. And we did that, you know, back in, you know, November, October of last year, just because we’re expecting inflation to come into play. There’s some other things to take a look at.
Now, this is one of our key holdings now that we’ve been placing some of the stock market money in, this is the spider which is state Street’s version of the Bloomberg one to three month, T-bill ETF ticker symbol, there’s bi L. And so rate of return has been a grand total of point four 2%, so far this year. But compared to negative 16, and negative 12. You know, that’s not terrible. And actually, you can see the progress there, It’s recently been paying more and more, because the three month t bill now is, you know, starting to get up to nearly 3%. So, you know, that’s, that’s a nice yield as far as that goes. So that’s another parachutes spot, we did not use this at the beginning of the year, we’re using it now more, it’s just a holding spot to wait and see what’s going to happen with the market. It’s not a terrible holding spot. As far as that goes. It would be a decent parachute, though, if the market did fall a bunch more, right. So it’s good to have that. Because it’s hard to you can’t move that money into the overall bond market, because that seems to be falling too at the same time. So not a bad place. Another place is just money markets. This is the Vanguard, federal money market, the ticker symbols DMF x x. And so this is a grand total of a half a percent. A same thing, though, this one actually further risk. I mean, it has theoretically, a $1 share price that hasn’t changed in this whole timeframe. So there’s been no risk so far, that can change.
Gotta be careful with money markets a little bit. But generally speaking, they’ll stay at that one dollars. And so then we’re starting to see a higher and higher yield. I believe the yield on this is above 2.4%. Right now, if you look at what is paid over the last seven days, so you know, that’s reflective of that curve. This is not bad parachute just because of the low risk, right? So a place to hold money and kind of wait for things to get better as far as that goes. And then there’s, you know, utilities, which generally will do well in this environment. This is a Vanguard utility ETF VPU is the ticker symbol that is actually up 8.3%. Utilities are tend to be a safe haven, because they provide something that everybody needs. And they pay big dividends, which have been really popular right now in this higher inflationary environment. But you can see, you know, it’s not a risk free scenario, not nothing like the money market that we just talked about. But that’s an hedge. Again, we haven’t used that just because you know, the risk versus reward here. And certainly a problem when the market turns around these will start to underperform. So and then the last one has been a hedge this year, especially, this is the Vanguard energy ETF V d is the ticker symbol. That’s up 45.6%. So far this year.
However, if you look at it in the last, you know, I think since the middle of June, has actually underperformed the market a fair amount. So this is quite volatile, I have no trouble with people that want to put something like this in their portfolio, but we tend to stay away from it for the most part, just because of the volatility of it as far as that goes. So those are some of the parachutes that are out there. I think it’s more important, though, to look at, you know, what parachute you would use, you know, now going forward. And so, again, we’re using, you know, money markets, T bills, ultra short term bonds, kind of, you know, things that are more, you know, along the lines of this right now, just because, you know, again, if the market takes off that, you know, utilities is going to fall, energy has been falling because the fear of recession. So, you know, there’s some there’s some really interesting things going on right now in those arenas. So this is not a bad place to be at this point for a parachute and that’s what we’re using. We’re packing In a parachute with T bills and ultra short term bonds and things like that so but it’s a really good question