I urge you to read all you can on investing. I urge you to push beyond your comfort level of investing. You may be an investor who believes in the high’s of the market or believes in the low’s of the market. Believe me when I tell you that the best investors are the one’s that can sniff out the best places to be with their money. Either in an upswing or a downswing there is money to be made. You just need to push beyond your comfort level of what you know and do the research because there is always more to be made. No matter which way the market goes believe me some one is taking advantage of the swing of the market.
Income Investing: Selecting the Right
Stuff
When is 3 percent better than 6 percent? Yeah, we all know the
answer, but only until the prices of the securities we already own
begin to fall. Then, logic and mathematical acumen disappear and we
become susceptible to all kinds of special cures for the periodic onset
of higher interest rates. We’ll be told to sit in cash until rates stop
rising, or to sell the securities we own now, before they lose even
more of their precious Market Value. Other gurus will suggest the
purchase of shorter-term bonds or CDs (ugh) to stem the tide of the
perceived erosion in portfolio values. There are two important things
that your mother never told you about Income Investing: (1) Higher
Interest Rates are good for investors, even better than lower rates,
and (2) Selecting the right securities to take advantage of the
interest rate cycle is not particularly difficult.
Higher Interest Rates are the result of the Government’s efforts to
slow a growing economy in hopes of preventing an appearance of the
three headed inflation monster. A quick glance over your shoulder might
remind you of recent times when the government was trying to heal the
wounds of a misguided Wall Street attack on traditional investment
principles by lowering interest rates. The strategy worked, the economy
rebounded, and Wall Street is trying to scramble back to where it was
nearly six years ago. Think about the impact of changing interest rates
on your Income Securities during the past five years. Bonds and
Preferred Stocks; Government and Municipal Securities; they all moved
higher in Market Value. Sure you felt wealthier, but the increase in
your Annual Spendable Income got smaller and smaller. Your total income
could well have decreased during the period as higher interest rate
holdings were called away (at face value), and reinvestments were made
at lower yields!
How many of you have mental bruises from
the realization that you could have taken profits during the downward
trajectory of the cycle, on the very securities that you now lament
over. The nerve; falling below the price you paid for them years ago.
But the income on these turncoats is the same as it was in 2004, when
their prices were ten or twenty percent higher. This is the work of
Mother Nature’s financial twin sister. It’s like acorns, snowfalls, and
crocuses. You need to dress properly for seasonal changes and invest
properly for cyclical changes. Remember the days of Bearer Bonds? There
was never a whisper about Market Value erosion. Was it the IRS or
Institutional Wall Street that took them away?
Higher rates
are good for investors, particularly when retirement is a factor in
your investment decisions. The more you receive for your reinvestment
dollars, the more likely it is that you won’t need a second job to
maintain your standard of living. I know of no retail entity, from
grocery store to cruise line that will accept the Market Value of your
portfolio as payment for goods or services. Income pays the bills, more
is always better than less, and only increased income levels can
protect you from inflation! So, you say, how does a person take
advantage of the cyclical nature of interest rates to garner the best
possible income on investment quality securities? You might also ask
why Wall Street makes such a fuss about the dismal bond market and
offers more of their patented Sell Low, Buy High advisories, but that
should be fairly obvious. An unhappy investor is Wall Streets best
customer.
Selecting the right securities to take advantage
of the interest rate cycle is not particularly difficult, but it does
require a change in focus from the statement bottom line… and the use
of a few security types that you may not be 100% comfortable with. I’m
going to assume that you are familiar with these investments, each of
which could be considered (from time to time) for a spot in the well
diversified Income Portion of your Asset Allocation: (1) The
traditional individual Municipal and Corporate Bonds, Treasuries,
Government Agency Securities, and Preferred Stocks. (2) The eyebrow
raising Unit Trust varietals, Closed End Funds, Royalty Trusts, and
REITs. [Purposely excluded: CDs and Money Funds, which are not
investments by definition; CMOs and Zeros, mutations developed by some
sicko MBAs; and Open End Mutual Funds, which just can’t work because
they are really “managed by the mob”… i.e., investors.] The market
rules that apply to all of these are fairly predictable, but the
ability to create a safer, higher yielding, and flexible portfolio
varies considerably within the security types. For example, most people
who invest in Individual bonds wind up with a laundry list of odd lot
positions, with short durations and low yields, designed for the
benefit of that smiling guy in the big corner office. There is a better
way, but you have to focus on income and be willing to trade
occasionally.
The larger the portfolio, the more likely it
is that you will be able to buy round lots of a diversified group of
bonds, preferred stocks, etc. But regardless of size, individual
securities of all kinds have liquidity problems, higher risk levels
than are necessary, and lower yields spaced out over inconvenient time
periods. Of the traditional types listed above, only preferred stock
holdings are easily added to during upward interest rate movements, and
cheap to take profits on when rates fall. The downside on all of these
is their callability, in best-yield-first order. Wall Street loves
these securities because they command the highest possible trading
costs… costs that need not be disclosed to the consumer, particularly
at issue. Unit Trusts are traditional securities set to music, a tune
that generally assures the investor of a higher yield than is possible
through personal portfolio creation. There are several additional
advantages: instant diversification, quality, and monthly cash flow
that may include principal (better in rising rate markets, ya follow?),
and insulation from year-end swap scams. Unfortunately, the Unit Trusts
are not managed, so there are few capital gains distributions to smile
about, and once all of the securities are redeemed, the party is over.
Trading opportunities, the very heart and soul of successful Portfolio
Management, are practically non-existent.
What if you could
own common stock in companies that manage the traditional Income
Securities and other recognized income producers like real estate,
energy production, mortgages, etc.? Closed End Funds (CEFs), REITs, and
Royalty Trusts demand your attention… and don’t let the idea of
“leverage” spook you. AAA + insured corporate bonds, and Utility
Preferred Stocks are “leverage”. The sacred 30-year Treasury Bond is
“leverage”. Most corporations, all governments (and most private
citizens) use leverage. Without leverage, most people would be
commuting to work on bicycles. Every CEF can be researched as part of
your selection process to determine how much leverage is involved, and
the benefits… you’re not going to be happy when you realize what you’ve
been talked out of! CEFs, and the other Investment Company securities
mentioned, are managed by professionals who are not taking their
direction form that mob (also mentioned earlier). They provide you the
opportunity to have a properly structured portfolio with a
significantly higher yield, even after the management fees that are
inside.
Certainly, a REIT or Royalty Trust is more risky
than a CEF comprised of Preferred Stocks or Corporate Bonds, but here
you have a way to participate in the widest variety of fixed and
variable income alternatives in a much more manageable form. When
prices rise, profit taking is routine in a liquid market; when prices
fall, you can add to your position, increasing your yield and reducing
your cost basis at the same time. Now don’t start to salivate about the
prospect of throwing all your money into Real Estate and/or Gas and Oil
Pipelines. Diversify properly as you would with any other investments,
and make sure that your living expenses (actual or projected) are taken
care of by the less risky CEFs in the portfolio. In bond CEFs, you can
get un-leveraged portfolios, state specific and/or insured Municipal
portfolios, etc. Monthly income (frequently augmented by capital gains
distributions) at a level that is most often significantly better than
your broker can obtain for you. I told you you’d be angry!
Another feature of Investment Company shares (and please stay away from
gimmicky, passively managed, or indexed types) is somewhat surprising
and difficult to explain. The price you pay for the shares frequently
represents a discount from the market value of the securities contained
in the managed portfolio. So instead of buying a diversified group of
illiquid individual securities at a premium, you are reaping the
benefit of a portfolio of (quite possibly the same) securities at a
discount. Additionally, and unlike regular Mutual Funds that can issue
as many shares as they like without your approval, CEFs will give you
the first shot at any additional shares they intend to distribute to
investors.
Stop, put down the phone. Move into these
securities calmly, without taking unnecessary losses on good quality
holdings, and never buy a new issue. I meant to say: absolutely never
buy a new issue, for all of the usual reasons. As with individual
securities, there are reasons for unusually high or low yields, like
too much risk or poor management. No matter how well managed a junk
bond portfolio is, it’s still just junk. So do a little research and
spread your dollars around the many management companies that are out
there. If your advisor tells you that all of this is risky, ill-advised
foolishness… well, that’s Wall Street, and the baby needs shoes.
About the Author: Steve Selengut
http://www.sancoservices.com
Professional Portfolio Management since 1979
Author
of: “The Brainwashing of the American Investor: The Book that Wall
Street Does Not Want YOU to Read”, and “A Millionaire’s Secret
Investment Strategy”
Powered by ScribeFire.
Investing in the high’s and low’s
Income Investing: Selecting the Right
Stuff
When is 3 percent better than 6 percent? Yeah, we all know the
answer, but only until the prices of the securities we already own
begin to fall. Then, logic and mathematical acumen disappear and we
become susceptible to all kinds of special cures for the periodic onset
of higher interest rates. We’ll be told to sit in cash until rates stop
rising, or to sell the securities we own now, before they lose even
more of their precious Market Value. Other gurus will suggest the
purchase of shorter-term bonds or CDs (ugh) to stem the tide of the
perceived erosion in portfolio values. There are two important things
that your mother never told you about Income Investing: (1) Higher
Interest Rates are good for investors, even better than lower rates,
and (2) Selecting the right securities to take advantage of the
interest rate cycle is not particularly difficult.
Higher Interest Rates are the result of the Government’s efforts to
slow a growing economy in hopes of preventing an appearance of the
three headed inflation monster. A quick glance over your shoulder might
remind you of recent times when the government was trying to heal the
wounds of a misguided Wall Street attack on traditional investment
principles by lowering interest rates. The strategy worked, the economy
rebounded, and Wall Street is trying to scramble back to where it was
nearly six years ago. Think about the impact of changing interest rates
on your Income Securities during the past five years. Bonds and
Preferred Stocks; Government and Municipal Securities; they all moved
higher in Market Value. Sure you felt wealthier, but the increase in
your Annual Spendable Income got smaller and smaller. Your total income
could well have decreased during the period as higher interest rate
holdings were called away (at face value), and reinvestments were made
at lower yields!
How many of you have mental bruises from
the realization that you could have taken profits during the downward
trajectory of the cycle, on the very securities that you now lament
over. The nerve; falling below the price you paid for them years ago.
But the income on these turncoats is the same as it was in 2004, when
their prices were ten or twenty percent higher. This is the work of
Mother Nature’s financial twin sister. It’s like acorns, snowfalls, and
crocuses. You need to dress properly for seasonal changes and invest
properly for cyclical changes. Remember the days of Bearer Bonds? There
was never a whisper about Market Value erosion. Was it the IRS or
Institutional Wall Street that took them away?
Higher rates
are good for investors, particularly when retirement is a factor in
your investment decisions. The more you receive for your reinvestment
dollars, the more likely it is that you won’t need a second job to
maintain your standard of living. I know of no retail entity, from
grocery store to cruise line that will accept the Market Value of your
portfolio as payment for goods or services. Income pays the bills, more
is always better than less, and only increased income levels can
protect you from inflation! So, you say, how does a person take
advantage of the cyclical nature of interest rates to garner the best
possible income on investment quality securities? You might also ask
why Wall Street makes such a fuss about the dismal bond market and
offers more of their patented Sell Low, Buy High advisories, but that
should be fairly obvious. An unhappy investor is Wall Streets best
customer.
Selecting the right securities to take advantage
of the interest rate cycle is not particularly difficult, but it does
require a change in focus from the statement bottom line… and the use
of a few security types that you may not be 100% comfortable with. I’m
going to assume that you are familiar with these investments, each of
which could be considered (from time to time) for a spot in the well
diversified Income Portion of your Asset Allocation: (1) The
traditional individual Municipal and Corporate Bonds, Treasuries,
Government Agency Securities, and Preferred Stocks. (2) The eyebrow
raising Unit Trust varietals, Closed End Funds, Royalty Trusts, and
REITs. [Purposely excluded: CDs and Money Funds, which are not
investments by definition; CMOs and Zeros, mutations developed by some
sicko MBAs; and Open End Mutual Funds, which just can’t work because
they are really “managed by the mob”… i.e., investors.] The market
rules that apply to all of these are fairly predictable, but the
ability to create a safer, higher yielding, and flexible portfolio
varies considerably within the security types. For example, most people
who invest in Individual bonds wind up with a laundry list of odd lot
positions, with short durations and low yields, designed for the
benefit of that smiling guy in the big corner office. There is a better
way, but you have to focus on income and be willing to trade
occasionally.
The larger the portfolio, the more likely it
is that you will be able to buy round lots of a diversified group of
bonds, preferred stocks, etc. But regardless of size, individual
securities of all kinds have liquidity problems, higher risk levels
than are necessary, and lower yields spaced out over inconvenient time
periods. Of the traditional types listed above, only preferred stock
holdings are easily added to during upward interest rate movements, and
cheap to take profits on when rates fall. The downside on all of these
is their callability, in best-yield-first order. Wall Street loves
these securities because they command the highest possible trading
costs… costs that need not be disclosed to the consumer, particularly
at issue. Unit Trusts are traditional securities set to music, a tune
that generally assures the investor of a higher yield than is possible
through personal portfolio creation. There are several additional
advantages: instant diversification, quality, and monthly cash flow
that may include principal (better in rising rate markets, ya follow?),
and insulation from year-end swap scams. Unfortunately, the Unit Trusts
are not managed, so there are few capital gains distributions to smile
about, and once all of the securities are redeemed, the party is over.
Trading opportunities, the very heart and soul of successful Portfolio
Management, are practically non-existent.
What if you could
own common stock in companies that manage the traditional Income
Securities and other recognized income producers like real estate,
energy production, mortgages, etc.? Closed End Funds (CEFs), REITs, and
Royalty Trusts demand your attention… and don’t let the idea of
“leverage” spook you. AAA + insured corporate bonds, and Utility
Preferred Stocks are “leverage”. The sacred 30-year Treasury Bond is
“leverage”. Most corporations, all governments (and most private
citizens) use leverage. Without leverage, most people would be
commuting to work on bicycles. Every CEF can be researched as part of
your selection process to determine how much leverage is involved, and
the benefits… you’re not going to be happy when you realize what you’ve
been talked out of! CEFs, and the other Investment Company securities
mentioned, are managed by professionals who are not taking their
direction form that mob (also mentioned earlier). They provide you the
opportunity to have a properly structured portfolio with a
significantly higher yield, even after the management fees that are
inside.
Certainly, a REIT or Royalty Trust is more risky
than a CEF comprised of Preferred Stocks or Corporate Bonds, but here
you have a way to participate in the widest variety of fixed and
variable income alternatives in a much more manageable form. When
prices rise, profit taking is routine in a liquid market; when prices
fall, you can add to your position, increasing your yield and reducing
your cost basis at the same time. Now don’t start to salivate about the
prospect of throwing all your money into Real Estate and/or Gas and Oil
Pipelines. Diversify properly as you would with any other investments,
and make sure that your living expenses (actual or projected) are taken
care of by the less risky CEFs in the portfolio. In bond CEFs, you can
get un-leveraged portfolios, state specific and/or insured Municipal
portfolios, etc. Monthly income (frequently augmented by capital gains
distributions) at a level that is most often significantly better than
your broker can obtain for you. I told you you’d be angry!
Another feature of Investment Company shares (and please stay away from
gimmicky, passively managed, or indexed types) is somewhat surprising
and difficult to explain. The price you pay for the shares frequently
represents a discount from the market value of the securities contained
in the managed portfolio. So instead of buying a diversified group of
illiquid individual securities at a premium, you are reaping the
benefit of a portfolio of (quite possibly the same) securities at a
discount. Additionally, and unlike regular Mutual Funds that can issue
as many shares as they like without your approval, CEFs will give you
the first shot at any additional shares they intend to distribute to
investors.
Stop, put down the phone. Move into these
securities calmly, without taking unnecessary losses on good quality
holdings, and never buy a new issue. I meant to say: absolutely never
buy a new issue, for all of the usual reasons. As with individual
securities, there are reasons for unusually high or low yields, like
too much risk or poor management. No matter how well managed a junk
bond portfolio is, it’s still just junk. So do a little research and
spread your dollars around the many management companies that are out
there. If your advisor tells you that all of this is risky, ill-advised
foolishness… well, that’s Wall Street, and the baby needs shoes.
About the Author: Steve Selengut
http://www.sancoservices.com
Professional Portfolio Management since 1979
Author
of: “The Brainwashing of the American Investor: The Book that Wall
Street Does Not Want YOU to Read”, and “A Millionaire’s Secret
Investment Strategy”
Powered by ScribeFire.