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The Really Useless Thread

  • #145,281
  • Nov 15, 2016 2:50pm Nov 15, 2016 2:50pm
Quoting sisse
{quote} No no you are going somewhere else with the analysis. Lets keep it very simple for now. Fisher755 answer is the one we are looking for: {quote} Let's go even deeper and make it simpler: Q: If I give you $1000 and ask you to invest. I want the maximum return with obviously the minimum risk: Assumptions: -> We are in country ABC and 10yr yield will cost me -2% (e.g Switzerland) -> Stock XYX in the same period will return 5% What would be your preference as investor: putting the $1000 in Bonds...
right- high interest rates bad for equities- but why?

I assume you're illustrating that in your next question about investing 1k

So- Id say you'd take the 5% stock return over the -2% yield cost. You'd switch some or all once the the stock returns no longer offset the yield cost
  • #145,282
  • Nov 15, 2016 2:51pm Nov 15, 2016 2:51pm
Quoting Fisher755
{quote} Well, I hate to disappoint you bro, but you and I are small fish in the shark tank! I suggest you put your $$ in the sock. Just kidding.
Thank God we don't trade bonds or equities...yet
  • #145,283
  • Nov 15, 2016 2:52pm Nov 15, 2016 2:52pm
anybody else? lets set a time limit for the answer of 5 to 10 minutes max to make the conversation flow before the close....

sisse
Pending conversations? PM for a chat...I am mainly in OTM now
  • #145,284
  • Nov 15, 2016 2:54pm Nov 15, 2016 2:54pm
Quoting sisse
{quote} No. Assumptions stay the same. There is no change of rates ... sisse
Ok, then the only reason I can think of is the need for liquidity and/or splitting the risk. I'm afraid you will have to enlighten us..
PVSRA
  • #145,285
  • Nov 15, 2016 2:54pm Nov 15, 2016 2:54pm
Quoting sisse
Ok. Lets bastardise the explanation to get to the core of the point and hopefully have a small aha moment. Q: So if interest rates are going to rise, why is that important for an investor? sisse
In general, Investors are looking for maximum returns with minimum risks. As bonds are secure investments, they become very interesting when rates rise above inflation rates. Hence, bonds become like an insurance with a guarantee return. For this reason, money (some of it) will move from stocks to bonds.
  • #145,286
  • Nov 15, 2016 2:55pm Nov 15, 2016 2:55pm
Quoting Pharm0r
{quote} Thank God we don't trade bonds or equities...yet
As a newbie trader I started with equities. I wanted to trade of course... but my trades turned into investments..
PVSRA
  • #145,287
  • Nov 15, 2016 2:58pm Nov 15, 2016 2:58pm
Quoting sisse
{quote} No no you are going somewhere else with the analysis. Lets keep it very simple for now. Fisher755 answer is the one we are looking for: {quote} Let's go even deeper and make it simpler: Q: If I give you $1000 and ask you to invest. I want the maximum return with obviously the minimum risk: Assumptions: -> We are in country ABC and 10yr yield will cost me -2% (e.g Switzerland) -> Stock XYX in the same period will return 5% What would be your preference as investor: putting the $1000 in Bonds...
1- Invest in stocks
2- If interest rise above inflation, I might move some of my stock investment to bonds to minimize my risk of return
  • #145,288
  • Nov 15, 2016 2:59pm Nov 15, 2016 2:59pm
Quoting Fisher755
{quote} As a newbie trader I started with equities. I wanted to trade of course... but my trades turned into investments..
started with naked options here- my trades turned into

Heading home and have cleaners coming over- so my replies will be slow via phone...please continue. I'll be back with questions within an hour or so

Quoting Fadhl
{quote} 1- Invest in stocks 2- If interest rise above inflation, I might move some of my stock investment to bonds to minimize my risk of return
aha....
  • #145,289
  • Nov 15, 2016 3:04pm Nov 15, 2016 3:04pm
Quoting Pharm0r
{quote} right- high interest rates bad for equities- but why? I assume you're illustrating that in your next question about investing 1k So- Id say you'd take the 5% stock return over the -2% yield cost. You'd switch some or all once the the stock returns no longer offset the yield cost
Ok thats right on point 1.

  1. What would be your preference as investor: putting the $1000 in Bonds or Stocks?

Obviously you will want to put in Stocks because if you put in bonds you will lose money.

However the point I want to make here is in 2:

Assuming [the assumptions] stay the same what reason would make you change/swap all or part of the investment from one to the other?\

Its very simple...the only reason you will want to swap your investment to bonds in this cases is: RISK!!!! ... yes this is one of the keys in the explanation. If tomorrow risk (whatever reason) is going to make a sharp decline (what about Lehman?) in stock XYZ you may want to move to bonds even if it cost you to do so. Before we go deeper on this:

Q: If I give you $1000 and ask you to invest. I want the maximum return with obviously the minimum risk:

Lets change the Assumptions:
-> We are in country ABC and 10yr yield will return 0 (e.g US)
-> Stock XYX in the same period will return 5%
-> The yield in country ABC suddenly expected to increase to 3% while the return of stock XYZ will decrease to 3%.

  1. Would your investment allocation between Bonds or Stocks change or stay the same?
  2. If both instruments will return the same % Why would you prefer one over the other or its just a matter of taste to decide ?

sisse

Pending conversations? PM for a chat...I am mainly in OTM now
  • #145,290
  • Nov 15, 2016 3:07pm Nov 15, 2016 3:07pm
bond is risk free (unless default)
  • #145,291
  • Nov 15, 2016 3:08pm Nov 15, 2016 3:08pm
Quoting sisse
{quote} Ok thats right on point 1. What would be your preference as investor: putting the $1000 in Bonds or Stocks? Obviously you will want to put in Stocks because if you put in bonds you will lose money. However the point I want to make here is in 2: Assuming [the assumptions] stay the same what reason would make you change/swap all or part of the investment from one to the other?\ Its very simple...the only reason you will want to swap your investment to bonds in this cases is: RISK!!!! ... yes this is one of the keys in the explanation. If tomorrow...
If return is the same in stocks and bonds then bonds are no brainer choice. Thanks for clear explanation.
PVSRA
  • #145,292
  • Edited 3:26pm Nov 15, 2016 3:14pm | Edited 3:26pm
I'd put it in bonds, since I get the same return withless risk; it wouldn't make a lot of sense to undergo more risk for the same return.
Also this is leading me to understand what is the reason for the speculated future flow from equities to bonds... Return (Yield) of safe bonds is rising, therefore they are becoming more attractive so alongside with the potential risk of Trump etc policies, the money could switch from stocks to bonds, is that correct?
  • #145,293
  • Nov 15, 2016 3:19pm Nov 15, 2016 3:19pm
Quoting Pharm0r
right- high interest rates bad for equities- but why?
no, not necessarily - in fact, in many past periods of rate normalization (i.e., rising rates) in the US, stocks have rallied during and afterwards. You can't isolate the issue of risk in relation to one variable - that of interest rates. There are many other factors. For instance, one fear of rising rates is it will weigh down on the housing market, because mortgage rates will be higher. But we were paying >12% for a mortgage in the 80's and building twice the number of houses that we build today. Why?
"If The Fool persists in his Folly he will become wise." - William Blake
  • #145,294
  • Nov 15, 2016 3:21pm Nov 15, 2016 3:21pm
youd prefer bonds for minimum risk and less volitility
  • #145,295
  • Nov 15, 2016 3:24pm Nov 15, 2016 3:24pm
Quoting Pharm0r
youd prefer bonds for minimum risk and less volitility
in the real world, the major players in the bond market (i.e., Central Banks, pension funds, insurance companies, etc) are buying bonds because they are required to do so by law. They are not allowed to buy penny stocks with your retirement money, for instance.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #145,296
  • Nov 15, 2016 3:25pm Nov 15, 2016 3:25pm
Exactly @Fadhl @change @Fisher755 ...and @Pharm0r

Bonds are the exact definition of HAVEN . Even more Treasuries.

--> Investors will ALWAYS ALWAYS ALWAYS prefer to invest in a zero risk asset over a riskier one.

--> That raise the second point. The higher the expectations of YIELDS to raise the more pressure you will get in Equities.

Now you can clearly understand what we have been talking and trading in the last couple of years:

No risk, rates in 0, CB pumping money like mad with the economy in sharp uptrend ...where do you put your money?.... you wonder the sharp and almost ridiculous uptrend in Equities in the last few years.... Big money has been making a FEAST ...

So with that in mind:

--> Q: If I give you $1000 and ask you to invest. I want the maximum return with obviously the minimum risk:

Assumptions:
-> We are in country ABC and 10yr yield is expected to increase 3 fold in the next few years
-> Stock XYX is ATH (all time high), inflation and rates as expected to increase for at least 2 points in the same period
-> Global Risk is expected to sharply increase next years and international trade to severely decrease at the same time:

 

  1. Would you start relocating your portfolio between Bonds or Stocks for next years or your will keep it the same until all factors expected are confirmed?
  2. What do you think is the impact between interest rates and stocks?
  3. What do you think is the impact between inflation and stocks?

sisse

Pending conversations? PM for a chat...I am mainly in OTM now
  • #145,297
  • Nov 15, 2016 3:31pm Nov 15, 2016 3:31pm
Closed the day just coppers away from new ath in the S&P......I am trading SPX call spreads up around 2,210 - 2,230 over the next 2 weeks....
"If The Fool persists in his Folly he will become wise." - William Blake
  • #145,298
  • Nov 15, 2016 3:31pm Nov 15, 2016 3:31pm
thank you for the inputs as well @fool
  • #145,299
  • Nov 15, 2016 3:35pm Nov 15, 2016 3:35pm
Quoting sisse
What do you think is the impact between interest rates and stocks? What do you think is the impact between inflation and stocks? sisse
Higher interest rates mean less money to be spend by both consumers and companies, which means less revenue, company cashflow and thus less company value.

Inflation also means less consumer spendings?

In the end, risk for keeping the stocks will increase while a rate increase will make the bonds an ever safer option.
  • #145,300
  • Nov 15, 2016 3:37pm Nov 15, 2016 3:37pm
Quoting The Fool
Closed the day just coppers away from new ath in the S&P......I am trading SPX call spreads up around 2,210 - 2,230 over the next 2 weeks....
Expecting the pop as well to kill the year but they are struggling a lot in the highs ...

sisse
Pending conversations? PM for a chat...I am mainly in OTM now
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