Interesting piece in yesterday’s WSJ by Burton Malkiel (of Random Walk Down Wall Street fame).
The point of his piece is that bond yields will most likely fall below inflation for years to come due to excessive debt and low interest rates and that investors should take a look at their portfolios and make some changes. He recommends…
I think there are two reasonable strategies that investors should consider. The first is to look for bonds with moderate credit risk where the spreads over U.S. Treasury yields are generous. The second is to consider substituting a portfolio of dividend-paying blue chip stocks for a high-quality bond portfolio.
For the first, he recommends tax-exempt municipal bonds that get reliable revenues:
The first class is tax-exempt municipal bonds. The fiscal problems of state and local governments are well known, and the parlous state of municipal budgets has led to very high yield spreads on all tax-exempt bonds. Many revenue bonds with stable and growing sources of revenue sell at quite attractive yields relative to U.S. Treasurys.
For example, the New York/New Jersey Port Authority gets reliable revenues from airports, bridges and tunnels to support its debt. Long-term N.Y/N.J. Port Authority bonds currently yield close to 5%, and they are free of both federal and state and local taxes in the states in which they operate.
He also recommends foreign bonds in countries with low debt-to-GDP ratios like Australia.
Finally, he recommends investors consider a portfolio of bluc-chip stocks with generous dividends. One stock he highlights is AT&T.
All of this makes me wonder:
At what point does portfolio tweaking become market timing?