Want Safety? Try These Income Securities
An Easy Way to Time the Market
Professional Money Management versus Do-It-Yourself
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One of things I like best about writing Cabot Wealth Advisories is that it allows me to get outside my comfort zone--all week long I’m working within the growth stock system we follow at Cabot. But occasionally, like any investor, I also look for alternative investments that I can use to grow my wealth. That, after all, is why we’re all here.
Personally, I tend to be sort of a barbell investor. On one hand, I tend to be very aggressive on the growth side of the equation, running a concentrated portfolio of strong leading stocks during bull markets, and, of course, holding cash during bear markets.
However, I also spend a little time looking at other types of investments, especially in the income world. And in this area, I tend to look for safety; while there are undoubtedly opportunities for higher-yielding, higher-risk income investments, I try to find any unique-but-safe instruments that yield more than the current 1% (or less) found in money-market funds.
What have I recently found? Here are a couple of safe exchange-traded funds that recently piqued my interest; both of them pay dividends monthly.
The first is what I think of as a money-market alternative. It’s the PowerShares VRDO Tax-Free Weekly Portfolio (PVI); basically, it invests most of its money in variable rate demand obligation bonds, issued by municipalities. Its current annual yield is just 1.5% ... although that’s free from federal taxes, so it would be like having a taxable fund yielding 2% to 2.25%, depending on your tax bracket. At the end of last year, all of the firm’s holdings were ranked either AAA (the highest ranking) or AA.
Moreover, the fund, which has been around since November 2007, has a remarkably stable net asset value. At month’s end, its NAV has always totaled between 25 and 25.06 per share! And the share price (it trades just like a stock) has also been stable, closing near 25 almost every day; even during last fall’s market mayhem, the lowest close was 24.6 before bouncing back within a couple of days.
If you have money that you’ve decided to just keep on the sideline for the next year or two (possibly you’re buying a house or for a child’s education), this could be a low-risk way of getting a bit more yield.
One that’s a bit higher up on the yield scale is the Vanguard Total Intermediate-Term Bond ETF (BIV). The company’s holdings, at the end of 2008, were very high quality--58% were rated AAA (most of which are Treasuries and Agencies), 8% AA, and another 18% rated A. That leaves just 15% rated BBB or below. And, as the name suggests, its holdings are generally intermediate-term (five to 10 years in length).
The annual yield is currently in the 4% to 4.25% range, and it pays dividends monthly. Moreover, the fund, which has been around since April 2007, has a relatively stable NAV--it’s closed every month between 70 and 78.
There are smarter income investors than me, and undoubtedly, there are some outright bargains these days in the higher-yielding, junk bond, or commodity trust securities. (Income Digest, which Cabot publishes, is really a great source of these ideas. Click here to learn more: http://www.cabot.net/info/id/idjk00.aspx?source=wc01.) But if you plan on making most of your money in growth stocks, but also want to safely earn a few extra bucks, consider some stable bond funds like PVI and BIV.
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Back to the stock market, I’ve been thinking more and more about the historic decline we’re living through, and I think this will become a litmus test for investment advisors and money managers in the years ahead. The most popular question will be, “How did you perform during the 2007-2009 bear market?”
The advisors who fared poorly will likely struggle to get new clients or hold on to their current ones, and hence, may have trouble surviving. But the advisors that avoided most of the bear market and didn’t fall prey to the classic “you must remain fully I invested at all times!” mantra should thrive in the years ahead.
The real question you should be asking yourself if you’ve lost big money during the past year or two is, “How can I avoid this from ever happening to me again?” One answer, of course, is to swear off the market for good ... put all your money in CDs and money-market funds. But I certainly advise against that--my guess is that, during the next 10 years, there are going to be huge, huge money-making opportunities, as today’s depressed levels will lead to a big bull market sometime down the road.
No, what you want is to avoid the meat of these nasty bear markets, but also profit from the following bull market. You can do it. And it doesn’t take a far seeing eye or a deep understanding of the credit markets. All it takes is the discipline to follow the market’s trend.
That’s my biggest piece of advice for you: Dedicate yourself to adhering to a trend-following market timing system. It’s not as sexy as forecasting what will happen down the road but it will be more profitable!
My suggestion is to get familiar with charts (there are many free charting programs online) and take five minutes to look at some of the major indexes every day or two. On the chart, you want to plot the index itself (say, the S&P 500), and you also want to plot its 50-day moving average. If most indexes are above their 50-day line, you should be constructive toward stocks. If most are below, you should be defensive. It sounds simple ... and it is.
But such a simple system has many advantages, the biggest of which is powerful--by following the market’s trend, you’re guaranteed (that’s right--guaranteed) never to miss out on a major market upmove, nor will you ever stay heavily invested during a punishing downmove. How? Because if the indexes head south for any period of time, it will break through its 50-day moving average ... and force you to turn defensive. The opposite is true for a market advance.
What’s the downside? You will be subject to the occasional whipsaw--a new buy signal, for instance, could be reversed a couple of weeks later. And that will require you to be willing to quickly change your stance. These whipsaws can be frustrating, but in the long run, they’re a small price to pay for being in (or out of) the big moves in the market.
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Since I’ve already given you a couple of action items in today’s issue--some safe income securities and a market timing system you can follow--I wanted to touch on a topic many of you asked about in our last survey. The topic is professional money management, and the general question is, simply, is it worth it?
I have a few opinions on the subject. The first is that, like every profession, there are some great money managers out there, but there are many more average and below average ones, too. I recently read there are more than 8,000 equity mutual funds in the U.S., not to mention thousands of hedge funds. I’m sorry, but I can’t believe there are that many great money managers out there. And, frankly, that’s why most funds underperform the market.
Second, you have to remember what the manager’s incentive is--to keep you happy so you stick around, and even put more money in the fund. Remember, these people get paid by taking a 1% or so cut of the assets every year. So as long as you stay invested, they make money. That’s why most managers simply try to mimic their “target index,” while possibly making small side bets one way or the other; if they don’t do anything super dumb, they can simply explain it away by shrugging their shoulders and saying, “Hey, it was a terrible market.”
I’m in the market for a new house right now, and it’s a similar story for any real estate agent. While I think my agent is a nice guy, my wife and I always know that his incentive is to get us to buy a house, not necessarily to get us the best deal around. If we don’t buy anything, he’s not getting paid anything.
Back to professional money management, the bottom line is that, with the vast majority of managers out there, you’re going to get mediocrity ... you know, returns within a percent or two of the market every year. In a bull market, mediocrity can be a good thing--what’s wrong with making 20% a year during a bull market? Nothing at all.
But over the long-term, you can do much better if you have the desire and motivation to learn how the market actually works, learn what characteristics the biggest stock winners in history possessed, and have the discipline to follow a set to rules. It takes time and effort, but the desire to create great wealth and not just average returns was what motivated me to learn how the market really works. (And I’m still learning all the time!)
The good news is that you can learn the same tactics--I, and all the Cabot editors, try our best to educate subscribers in the proper way to evaluate the market and to find individual stocks. Thus, while there are certainly many top-notch money managers, you can certainly do great for yourself.
All the best,
Mike Cintolo
For Cabot Wealth Advisory
Editor’s Note: Every Monday our in-house staff, lead by Editor Michael Cintolo and aided by software program OptiMo, combs through stock charts to find the 10 strong charts that are most likely to keep on running higher in the weeks and months ahead. The result is an active investor’s guide to the best moneymaking possibilities TODAY. In past years, Cabot Top Ten Report has been an early recommender of Apple, Baidu, DryShips, eResearch, First Solar, Gamestop, Hansen Natural, Intuitive Surgical, Royal Gold, Titanium Metals and hundreds of other big winners. In 2009, it’s already identified the stocks that are attempting to lead the market higher today. If you want to own the best-performing stocks of 2009, I urge you to give it a try. To get started with a no-risk trial subscription, simply click here.
http://www.cabot.net/info/ctt/cttjb01.aspx?source=wc01
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