Portfolio Update - November: Rates Roaring, Credit Spreads Thinning
Well, interest rates climbed significantly higher during October 2024. It was nice to see the cut from the Federal Reserve, but the net result was rates moving up across most of the curve. Once again, I shifted my portfolio more towards defense. That was a nice call as higher rates pressured valuations, but we still saw values dip as most of our portfolio is invested. In early November, I’ve been favoring defense once again as we see Treasury yields continuing to trend higher.
In the event that we see tariffs used more broadly, it would have an inflationary impact. When those higher prices are passed on to consumers, it counts in the CPI. I wouldn’t expect 100% of the tariff impact to be passed on to consumers, but it could be a material portion. Given the sensitivity to even a 0.5% change in prices, that could influence the Federal Reserve. Continued deficits also drive inflation.
We were at 19.6% cash at the end of October and already increased that a bit further by selling our positions in Schwab (SCHW) and RCB (RCB) yesterday.
Today, we’re at about 22% cash and I’m still looking at options to increase it.
Interest Rates
Treasury rates are up significantly as projections for additional cuts from the Federal Reserve were substantially reduced. You can see the large increase in the rate on 2-year Treasuries:
Source: MBS Live
That same impact was passed through the yield curve. We see 10-year Treasury rates increased by a similar amount and are once again modestly higher than 2-year Treasury rates:
Source: MBS Live
Eventually this is going to be a huge problem for the country. As a nation, we’re refinancing older debt to higher rates and issuing new debt at higher rates. The average rate on the debt is still just over 2%. Resetting that to over 4% would double the federal interest expense before accounting for any new debt. How many years will it take for people to look back at this as a critical error?
Even though Treasury rates continued climbing in early November, the iShares Preferred and Income Securities ETF (PFF) managed to go ex-dividend AND see the share price move up by a penny. That spread between the yield from the preferred share ETF and Treasury yields continues to shrink.
Portfolio Updates
You can find prior installments of the Portfolio Updates on the Portfolio tab of our website.
Older editions of the Portfolio Update are unlocked for everyone. The newest release reserves the foreshadowing section for paid members (for a couple of weeks).
Trade Alerts
We have a page on our REIT Forum website to link all trade alert articles.
Here are The REIT Forum’s trade alerts.
Layout - Modified Order
To keep things simple for our investors, the rest of the portfolio update is divided into several segments. We run the same segments (with new content) each week.
We usually maintain the same order from month to month, but I revised the order to work better with free previews. Eventually, the order will be locked in again.
- Returns on Total Portfolio
- Sector Allocation
- Reminder About Cash
- Housekeeping
- Recently Closed Positions with Returns
- Recently Opened Positions with Returns
- All Open Positions by Sector with Returns
- Outlook
- Foreshadowing Potential Trades (paid section)
This layout maximizes transparency while keeping the foreshadowing of our potential trades within the paid section. It also loads the images together at the front, while putting the text-heavy sections together at the end.
Returns on Total Portfolio
Note: The presentation of the charts was modified slightly to enable running it through Google Sheets instead of Excel to reduce transferring data.
The chart below shows our performance since we began preparing for The REIT Forum at the start of 2016 through the end of the latest month:
There are four major index ETFs we use for evaluating performance. They are:
- (MORT) $MORT - Major mortgage REIT ETF
- (PFF) $PFF - The largest preferred share ETF
- (VNQ) $VNQ - The largest equity REIT ETF
- (KBWY) $KBWY - The high-yield equity REIT ETF most retail investors follow
Annual comparison vs. each ETF:
Our performance vs. the average of the ETFs:
We evaluate alpha based on performance against the ETFs because it strips out the general change in our sectors.
We delivered a respectable gain in August, but the indexes took the lead. Trailing this late in the year has been a rare occurrence.
The next chart shows the change in the value of our portfolio from month to month. We strip out the impact from contributions made during the month because, obviously, contributions are not returns.
The prior year is included as well to help investors see how the calculations work.
If anyone is confused by these calculations, let me know. I believe this transparency is crucial, so I’ll include an example showing every calculation if I hear that readers have any difficulty following it.
Sector Allocation Chart -
The sector allocation chart helps to explain how we are thinking about risk and seeking returns:
Reminder About Cash (repeated)
I normally keep at least 6 months or more of living expenses in “cash”. If you normally keep around $40k to $50k in “cash”, the difference between getting paid 5% and 0.2% is around $2k per year.
I’m using (SGOV), (SHV), and (BIL) as my cash substitutes. These are short-term Treasury ETFs. Prices are extremely stable. Liquidity is excellent.
I use a Schwab business account that is not part of my portfolio. The only assets it holds are actual cash and cash substitutes (those 3 ETFs).
Nearly all my expenses go through my credit card already (paid off in full each month).
I still have my checking through USAA because of the long history on those credit cards. If I need cash, I can sell Treasury ETFs and transfer the funds to my USAA account.
It takes a few days, but that’s fine.
This is a pretty nice return for cash I was going to have there anyway.
Note: Some people think you don’t need a strong credit score after getting a mortgage. I disagree. The long history on those cards is extremely useful if I want to boost someone’s credit score. If I add someone to my card, their next update will show they have a card with 20 years of perfect history.
You can get scammed this way. You are liable for the bill. They can just charge the card and walk away. This doesn’t concern me because I keep a lower limit (such as $10k) on those cards and I’m only doing it for people I trust. If one of those people betrays me, I’ll count myself lucky that I found out for only $10k. For people who can’t afford to risk that money, this would be too dangerous.
Housekeeping
We used to have a repeated section on strategy, but I wanted to shorten the update.
I’ll be posting an article that covers our strategy in greater depth and just adding a link to that post.
We have a project underway to update our guides and improve the organization.
Recently Closed Positions with Returns
These are the positions closed during the prior calendar month. If you want to see positions that were closed before that, you can see the prior portfolio updates or use the Google Sheets.
If we didn’t close any positions for the sector during the month, then the image will be blank.
Note: By loading the Google Sheets, you can still see all of our closed positions. We only include the recently closed positions to reduce the size of the article:
Recently Opened Positions with Returns
Well, none of those is helping our performance on the month.
The shares we bought in MFAO were the result of swapping from MFAN to MFAO. The prices shown are rounded to the nearest penny.
All Open Positions by Sector with Returns
We will start with the open positions as of the end of the month. It often takes a few days to prepare this article, but the screenshots below are from the end of the prior month.
The cell with the ticker is grey if the position is in a taxable account. This was a request by a few members and there was no drawback to adding the information. All of the taxable positions are in equity REITs.
Preferred shares and baby bonds:
Equity REITs:
Mortgage REITs and BDCs:
Other:
Subsequent Changes
We sold our shares of SCHW and our shares of RCB on 11/4/2024.
Foreshadowing Potential Trades
This section is usually prepared shortly before publishing. The goal is to quickly cover ideas for trades. We aim to foreshadow our trades here, though the market may move in surprising ways. While the article takes days to prepare and documents prices and performance from the end of the month, the potential trades section is written last to provide the most up-to-date pricing.
Based on the change in relative prices as of 11/05/2024 here are some of the trades on my radar.
Note: Some prices are end of day, some are during trading. It takes a bit to prepare this section for subscribers.
