Today’s Biggest Investment Risk: Charles Ellis of Greenwich Associates Lays it Out

In the 40 years since he founded Greenwich Associates, Charles Ellis has earned a reputation as one of the wisest sages in the investment world. The firm’s consulting business is limited to big-time institutional clients, but Ellis wisdom has always been in play for individual investors as well. He served as a director of the Vanguard funds and has written more than a dozen books, including the classic Winning the Loser’s Game: Timeless Strategies for Successful Investing.

Ellis recently sat down for a web cast with Vanguard investors and mixed in with his sane advice on how to invest (no surprise he’s been on the indexing bandwagon for a very long time) were a few timely insights.

He singled out one investment in particular as “taking one of the largest risks you could take” today. Care to hazard a guess what this investment guru considers the biggest risk in today’s dicey markets?

Answer in a chart:

10 Year Treasury Rate Chart

10 Year Treasury Rate data by YCharts

Yep, Treasuries, as in the 10-year Treasury rate.

For starters, Ellis noted that today’s yield doesn’t even keep pace with inflation, so you’re not even preserving your purchasing power.

10 Year Treasury Rate Chart

10 Year Treasury Rate data by YCharts

But the real risk is what might play out in the future. Ellis drew a comparison between current Federal Reserve policy (which he wholeheartedly agreed with) and what happened in the aftermath of aggressive Fed easing in the 1940s and early 1950s. In the 30 years after the Fed took that tact to help pay for the war, rates rose. And rose. And when rates rise, bond prices fall. That’s the risk Ellis is talking about.

Ellis is not suggesting he knows when rates will start to rise; his point is that anyone owning bonds today is taking on a lot of rate risk going forward.

He went on to suggest that investors insistent on owning bonds stick with short term issues.

Duration is a telling measure of interest rate sensitivity. A lower duration means less yield today, but also a less painful price change when rates do rise.

The very short-term Pimco 1-3 Year Treasury Index ETF (TUZ) sure looks like a dog when stacked up against the iShares Barclays 20+ Treasury bond ETF (TLT).

TUZ Chart

TUZ data by YCharts

But with a duration of 1.9 years, the Pimco ETF will suffer a price decline of less than 2 percent if rates rise just one percentage point. The iShares long-term Treasury portfolio has a duration of nearly 17 years. That’s a 17% price decline if rates were to rise just 1 percentage point.

You really want to take on that sorta risk with your bond portfolio?

Carla Fried is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.

Read more articles about: Investing Ideas  

blog comments powered by Disqus
Advertisement

Search Articles

Subscribe to YCharts Analysis

Advertisement

{{root.upsell.info.feature_headline}}.

{{root.upsell.info.feature_description}}
Start your free 14 Day Trial.

{{root.upsell.info.button_text}} No credit card required.

Already a subscriber? Sign in.