Dedicated to Deposits: Deals, Data, and Discussion
Featured Savings Rates
Featured Accounts
Back to Investments

How Chasing Yield Affects Expected Returns

Saturday, June 8, 2013 - 9:29 AM
The Federal Reserve's easy monetary policy has led many investors, especially those who take a cash flow (instead of a total return) approach to their portfolio, on a desperate search for yield. The search typically begins by moving some assets from high-quality bonds, such as Treasuries, government agencies, FDIC-insured CDs and investment grade bonds, to riskier bonds, such as high-yield and junk bonds. Another alternative that has become more "fashionable" is to move assets from safe bonds to assets with stock-like risks (assets whose prices tend to fall sharply when stock prices fall sharply). Probably the two most common alternatives are REITs and stocks with high-dividend yields.

With this fixation on yield, investors may have lost sight of the impact of valuations on expected returns. And the chase for yield has driven valuations on REITs and high-dividend paying stocks to levels that have a large impact on their expected returns.

How chasing yield affects expected returns - CBS News
8
ShorebreakShorebreak2,371 posts since
Apr 6, 2010
Rep Points: 12,657
1. Sunday, June 9, 2013 - 3:09 PM
Valuable article by Larry Swedroe (author of many books; e.g., "Rational Investing in Irrational Times"), whom I highly respect.

"A more effective way of achieving higher expected returns would be to invest in value stocks, with value being defined not by a high dividend yield but rather by low price-to-book market value, low price-to-earnings or low price-to-cash flow.

Another alternative is for investors to increase their allocation to international stocks, which currently have higher expected returns than domestic stocks."

I personally invest in TIAA Real Estate, which is less risky than REIT.  My muture fund selections tend to be value-oriented vs. high dividend fund.  I am not certain about international fund/stocks at this point, since U.S. still has the most stable economy and stock market.
4
51hh51hh1,461 posts since
Jan 16, 2010
Rep Points: 6,351
Reply