Weaving the Strands: Business, Economics, and Tax Policy 2.0

[Jimjamesak]

Only the highest quality of junk for our teachers!

Teachers in Canada invest in hockey teams.

Teachers in Louisiana invest in junk.

 

[Kepler]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

While I'm not big on junk bonds, I do know that there are some very savvy investors out there that make a nice living exclusively trading them.

A rich pusher does not indicate healthy users, only numerous ones.

 

[SJHovey]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

This is bad advice. High risk is single mad-cap or small-cap stocks. Not junk bonds. Especially when it comes to retirement funds.

Junk bonds are junk and should he avoided completely.

No, it's not bad advice. In fact, pretty much anyone who has money socked away in a 401(k) or IRA or something else that includes mutual funds probably has some of their money parked in "junk" bonds.

Junk bonds are just bonds, that have a higher yield and a higher risk. There may be many reasons for this. But I get a kick out of people who turn up their nose at junk bonds, only to willingly throw a few dollars at an up and coming tech company stock.

The risk of junk bonds is default. But what is that risk exactly? When the economy is humming along as it is now, default rates probably fall around 1%. When the economy sucks, it's a much dicier proposition. The default rate can certainly climb into double digits.

I don't recommend that you go out and buy the junk bonds of an individual company. Too many eggs in one basket. But, you put a small amount of your money into a fund that takes it's money and spreads it out over hundreds of different bonds, it can be a very good investment.

 

[Kepler]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

The risk of junk bonds is default. But what is that risk exactly? When the economy is humming along as it is now, default rates probably fall around 1%.

But junk debt isn't spread evenly across the entire economy, it's concentrated in particular sectors where the risk of default is by definition much higher, otherwise they wouldn't be junk bonds.

You are saying the equivalent of "Only a tiny percentage of pedestrians are killed each year, so you go right ahead and sprint across I-95."

 

[dxmnkd316]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

No, it's not bad advice. In fact, pretty much anyone who has money socked away in a 401(k) or IRA or something else that includes mutual funds probably has some of their money parked in "junk" bonds.

Junk bonds are just bonds, that have a higher yield and a higher risk. There may be many reasons for this. But I get a kick out of people who turn up their nose at junk bonds, only to willingly throw a few dollars at an up and coming tech company stock.

The risk of junk bonds is default. But what is that risk exactly? When the economy is humming along as it is now, default rates probably fall around 1%. When the economy sucks, it's a much dicier proposition. The default rate can certainly climb into double digits.

I don't recommend that you go out and buy the junk bonds of an individual company. Too many eggs in one basket. But, you put a small amount of your money into a fund that takes it's money and spreads it out over hundreds of different bonds, it can be a very good investment.

No one on this board, at least that I'm aware of, is savvy enough to play around with junk bonds. A prudent investor would never seek out funds for retirement that are invested heavily (relatively speaking) in junk bonds. Most funds have them in their portfolio, but you have to be fairly young to be willing to accept that kind of risk on anything more than a few tenths of a percent of their personal portfolio.

Even then it's hardly worth the risk unless you are going to put a decent chunk of money into them. Again, we are talking about retirement funds not investment or brokerage accounts. Retirement has no business being invested in stupidly risky bets.

 

[SJHovey]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

But junk debt isn't spread across the entire economy, it's concentrated in particular sectors where the risk of default is by definition much higher, otherwise they wouldn't be junk bonds.

You are saying the equivalent of "Only a tiny percentage of pedestrians are killed each year, so you go right ahead and sprint across I-95."

While certain sectors may have more junk bonds than others, I think you can find them in all sectors. There are even municipal junk bonds.

What I am saying is that it's a risk/reward analysis. People do get hit crossing streets. But we analyze the risk, pick our spots, and go.

You put a very small percentage of your money in "growth" stocks, or high yield (junk) bonds. There is a risk in all of it. It would be great if we could all just put our money in certificates of deposit and collect 8-10% return, but that ain't happening.

As for public pensions doing it, that's why they have to get permission. They are taking on an investment that has a higher risk overall. But I think you can justify it in the right circumstances.

 

[St. Clown]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

But junk debt isn't spread evenly across the entire economy, it's concentrated in particular sectors where the risk of default is by definition much higher, otherwise they wouldn't be junk bonds.

You are saying the equivalent of "Only a tiny percentage of pedestrians are killed each year, so you go right ahead and sprint across I-95."

Any upstart company is likely to have junk bond ratings, regardless of economic sector. Yes, new fields are going to have more companies with junk bond ratings than long established fields, but this is the same as people speculating on stocks. In fact, "junk bonds" are just another name for speculation graded bonds.

 

[dxmnkd316]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

The best in class is the Wellington fund and they are only in about 0.11% junk.

 

[Kepler]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

Any upstart company is likely to have junk bond ratings, regardless of economic sector. Yes, new fields are going to have more companies with junk bond ratings than long established fields, but this is the same as people speculating on stocks. In fact, "junk bonds" are just another name for speculation graded bonds.

Which is great if you want high risk / high return -- everybody's a 20-something idiot once -- but the whole point of pensions is steady return. If the pension is trying to goose the numbers by throwing money at junk bonds that HAVE TO promise big returns because of the risk of default, they're cheating and they are knowingly risking royally effing the pensioners. Pension managers who do that should go to federal PMITA prison. Stripped of all the financial niceties, all they're doing is stealing.

 

[SJHovey]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

No one on this board, at least that I'm aware of, is savvy enough to play around with junk bonds. A prudent investor would never seek out funds for retirement that are invested heavily (relatively speaking) in junk bonds. Most funds have them in their portfolio, but you have to be fairly young to be willing to accept that kind of risk on anything more than a few tenths of a percent of their personal portfolio.

Even then it's hardly worth the risk unless you are going to put a decent chunk of money into them. Again, we are talking about retirement funds not investment or brokerage accounts. Retirement has no business being invested in stupidly risky bets.

I can't speak for others. But the as far as I could tell from the article, the USCHO members are not going to be put in charge of this investment. These are actually professionals who do have the time and skills necessary to analyze this.

Second, they are not "heavily" investing in junk bonds. I don't advocate that, nor would anyone. High yield bond funds are like high growth stock funds, or similar investments. They are an important, albeit smaller, part of any investment portfolio.

These public pensions are caught in this situation where everyone complains because the benefits aren't keeping up with inflation/cost of living increases, yet we want to limit their investment risk to jamming the cash in a safe deposit box.

 

[Kepler]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

I can't speak for others. But the as far as I could tell from the article, the USCHO members are not going to be put in charge of this investment. These are actually professionals who do have the time and skills necessary to analyze this.

I strongly suspect the last sentence is a case of the emperor having a string bikini, at best. Maybe the faculty of the MIT econ department actually know what they're doing when it comes to junk bonds, but Jill Work-a-day Financial Consultant is just being paid to keep the game going. She doesn't really "know" much, if anything at all. She's a realtor, but she's moving bonds rather than condos. And just as with a realtor, the only thing that matters is the sale.

 

[dxmnkd316]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

Give me a GD break. They are more than keeping up with inflation. I am in a fairly low risk portfolio (I'd say the vast majority are in Vanguard's total stock market or more conservative) and I'm seeing great returns this year. As I have for years. This junk bond garbage is a terrible, terrible idea. As are outrageously high guaranteed returns. Just a great way to guarantee you will end up with nothing.

 

[St. Clown]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

I strongly suspect the last sentence is a case of the emperor having a string bikini, at best. Maybe the faculty of the MIT econ department actually know what they're doing when it comes to junk bonds, but Jill Work-a-day Financial Consultant is just being paid to keep the game going. She doesn't really "know" much, if anything at all. She's a realtor, but she's moving bonds rather than condos. And just as with a realtor, the only thing that matters is the sale.

He's talking about the financial analysts working within the fund companies, those who are paid to analyze debt investments for the fund managers, not the salespeople with the FINRA Series 6 & 63 who also sell life insurance policies.

 

[SJHovey]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

I strongly suspect the last sentence is a case of the emperor having a string bikini, at best. Maybe the faculty of the MIT econ department actually know what they're doing when it comes to junk bonds, but Jill Work-a-day Financial Consultant is just being paid to keep the game going. She doesn't really "know" much, if anything at all. She's a realtor, but she's moving bonds rather than condos.

Then the problem has nothing to do with junk bonds and everything to do with whom Louisiana is entrusting its money. If I had nearly $15 billion to invest, I guarantee I would find someone who knows what they are doing.

While these pensions need a steady flow of income to pay the current benefits, we also have to keep in mind that they are taking in money from and investing for the benefits to be paid decades in the future to younger employees. This isn't the case where a pension should just look at their investments like they are a 70 year old living in Pensacola.

If I were a Louisiana employee, I would want them to take what I would consider to be "slightly conservative to average" approach to investment. That is, I don't want them to just blow the cash entrusted to them, but I want them to invest it the way I would invest my own money, looking for some return.

I don't know other than from my own personal talks with investment advisors, but I would be shocked if there are average risk/return investment strategies out there that don't include a recommendation that somewhere between 0 and 10% of your money be invested in high yield bonds/aggressive growth stocks.

 

[Kepler]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

He's talking about the financial analysts working within the fund companies, those who are paid to analyze debt investments for the fund managers, not the salespeople with the FINRA Series 6 & 63 who also sell life insurance policies.

In all honesty, I'm not sure there's much of a difference. The financial analysts just smell better and went to Dartmouth.

 

[Kepler]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

Then the problem has nothing to do with junk bonds and everything to do with whom Louisiana is entrusting its money. If I had nearly $15 billion to invest, I guarantee I would find someone who knows what they are doing.

I agree with you there. Junk debt has an appropriate and provident purpose (culling suckers). Just as three-year olds should not be trusted with matches, pension fund managers should not be trusted with "high yield except no yield because it defaulted" flypaper.

 

[SJHovey]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

Give me a GD break. They are more than keeping up with inflation. I am in a fairly low risk portfolio (I'd say the vast majority are in Vanguard's total stock market or more conservative) and I'm seeing great returns this year. As I have for years. This junk bond garbage is a terrible, terrible idea. As are outrageously high guaranteed returns. Just a great way to guarantee you will end up with nothing.

Great. My guess is that your Vanguard fund (which from it's name sounds like is limited to stocks, probably across a broad spectrum), includes any number of what we all would agree are stocks with a decent amount of risk attached to them. Maybe in emerging technologies area. Maybe in small companies. It's probably a pretty small percentage of the total fund, but they are there. And they are an important part of the total overall performance of the fund. You have undoubtedly received documents from them that tell you what they are invested in. If you don't have any higher risk/higher return stocks in that fund, I'll be shocked.

 

[dxmnkd316]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

Total stock market is basically the s&p 500. For 99.9% of people, this would more than suffice. Hell, even Warren Buffet has put it in his will that everything he's leaving to his wife is going to the S&P.

Seriously. If I were a teacher in this day and age, I'd bet on NOT having a pension when I retire. At least not a defined benefit pension.

I like what they do at our company. Every paycheck they give you 3% of your gross on top of your salary, put it in your pension, and match it to what you gave in your 401(k).

 

[St. Clown]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

100% 401(k) here; pension contributions ended about four months after I was hired. So at this rate, I'll have a pension benefit of about $200/yr. By the time I retire, that'll be enough for a week's worth of groceryies, so I'm not counting it.

We're matched 100% on our first 4% we contribute. The match money all goes into the company stock fund, but can then be moved after X months (forget the term, but I never move it as the stock is very strong). This used to be a fairly common featuer for a lot of plans, but I'm not sure today after the whole Enron debacle.

 

[Kepler]

Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0

The match money all goes into the company stock fund, but can then be moved after X months (forget the term, but I never move it as the stock is very strong).

Oh, dude. Move it. Having your job and your investments in only one basket... I don't really care how strong that basket is.