At our 14th Annual Investment U Conference at the beautiful Grand Del Mar in San Diego last week, I discussed a number of attractive investment opportunities available right now.

But I also warned them about one of the worst investments you can make. Take a minute now to make sure you don’t have it in your portfolio right now.

As I mentioned in a recent Investment U column, we’re at the tail end of the biggest 30-year rally in bonds the nation has ever seen. Three decades ago, Fed Chairman Paul Volcker pushed the prime rate up to 21.5% to squelch inflation. Long-term Treasury yields reached 16%. From that pinnacle, long-term yields have plummeted to 3.1% today. Bond prices have soared accordingly.

But the financial crisis is over and the economy is beginning to show a pulse. Higher inflation may be just around the curve. And as yields move up, bond prices move down. And perhaps way down.

Just about the worst thing you can own when interest rates are moving up is a leveraged bond fund. When a fund manager borrows short term at low rates in order to buy additional long-term fixed-income investments for his fund, it’s the equivalent of buying stocks on margin. It works fine while bond prices are flat or rising. But when bond prices fall – as they will when interest rates rise – these shareholders take a shellacking. If you’re not sure whether the bond funds you own are leveraged, don’t guess. Call the funds and ask.

And if you owned a leveraged closed-end fund, don’t even call. Just get out, especially if the fund is trading at a premium to its net asset value (NAV).

Recall that closed-end funds are not like Fidelity or Vanguard mutual funds. Like ETFs, they trade on an exchange and can be bought and sold throughout the day (not simply redeemed at the closing price like open-end mutual funds).

However, closed-end funds can see their prices fluctuate well above or below their net asset values (NAV). When a fund trades above its NAV, it is said to be trading at a premium. And when it trades below the NAV, it is trading at a discount.

There is no easier (or more obvious) buy or sell signal than to buy these funds when they trade at big discounts and sell them when they go to a premium.

If those premiums are huge – as many are in the fixed-income sector right now – they are ticking time bombs that you definitely don’t want in your portfolio. Here are just a few that are particularly dangerous right now:

And then there is the biggest stink bomb of them all: PIMCO High Income Fund (NYSE: PHK), currently trading at a 60.4% premium to its net asset value. Over 60%! That is completely nuts. These shareholders are clearly asleep – and overdue for a rude awakening.

Even if your closed-end funds aren’t on this list, don’t be complacent. Call your mutual fund and ask if the manager is using leverage. Or visit a free website like www.cefconnect.com and check out the relationship of your closed-end funds to their net asset values.

It may well be the most important three minutes you spend on your portfolio this year.

Good Investing,

Alexander Green

Bond, Business/Finance, Chairman, Chief Investment Strategist, Closed-end fund, Exchange-traded fund, Finance, Financial economics, Financial services, Funds, Futures contract, hedge fund, Interest rate, investment, Long-Term Capital Management, Mutual fund, Net asset value, Open-end fund, Paul Volcker, San Diego, US Federal Reserve

The Ultimate Alternative Investment?
by Alexander Green, Investment U Chief Investment Strategist
Friday, February 10, 2012: Issue #1706

Last week I spoke at an investment conference at Rancho Santana, a charming resort community on the Pacific coast of Nicaragua, near the town of San Juan del Sur.

Set on more than two miles of coastline with rolling hills and dramatic cliffs, the reserve attracts expats, investors, surfers and nature lovers from all over the world. They like the idea of owning a piece of – or at least visiting – one of the most spectacular stretches of coastal land in the world.

Some are attracted because the property is so inexpensive. It’s hard to believe you can buy a stunning home site directly on the Pacific Ocean for less than $175,000.

And it’s not just the property that’s inexpensive. One evening 14 of us rode into town to have dinner at a favorite local restaurant, Yolanda’s. The proprietor served up heaping helpings of local lobster, fresh vegetables, black beans and rice, plantains and plenty of Corona beer. When I picked up the tab, I was shocked. The cost was less than $9 a person.

Some investors here are banking on increased foreign investment and commercial development. The International Monetary Fund estimates that Nicaragua’s economic growth hit 4% last year… and is on the verge of accelerating.

Exports jumped 23% last year. Tourism is up. MSN Money ranked Nicaragua at the top of their list of “Ten Exotic Retirement Spots for 2011,” telling readers “[Now] is the time to put this country at the top of your super-cheap overseas retirement list.” CNN Money calls it “the next Costa Rica.” Indeed, Rancho Santana is just 50 miles north of the Costa Rican border.

Good things are happening locally, too. A local business leader plans to invest $300 million next door in a world-class marina, golf and spa resort called Guacalito. Due to open in Spring 2013, it’s located just 30 minutes from Rancho Santana and is already bringing increased investment and improved infrastructure to the region. And an international airport is planned for the Tola area, located less than a half hour away.

Other investors are putting money to work here for privacy reasons. They want to diversify their portfolios beyond the prying hands of angry ex-spouses or potential litigants.

But for most, it’s the sheer beauty of the place. The New York Times points out that, “The beaches are among the finest in the Americas, and among the least developed.” Gaze out from atop one of the many bluffs on this 2,700-acre reserve and you’ll see what the coast of California looked like a hundred years ago, pristine and largely undeveloped.

Residential lots are selling quickly. Over 50 homes have been built and 24 more are under construction. It’s not hard to see why. The terrain is such that home sites can capture views of the ocean, the nearby valley and lovely sunsets. Labor costs are significantly lower here. And a master association and various sub-associations exist so that owners are assured that high and consistent standards of quality are maintained.

Is oceanfront property in Nicaragua the ultimate alternative investment? That’s for you to decide. But if you’d like to learn more, feel free to visit the website or, better yet, sign up for a property tour.

The cost is $500 per person ($600 per couple) and includes all transportation, breakfast and three nights in oceanfront accommodations at Rancho Santana. This is a great trip for those wanting to come down and investigate investment, second home or retirement opportunities. (Contact Bryan McMandon.)

In the interest of full disclosure, Rancho Santana is being developed, in part, by colleagues of mine at Agora Publishing. However, I am not compensated in any way (directly or indirectly) for any sales at the development. I just think it’s a beautiful place and an interesting investment.

And whether you decide to invest or not, I know you’d enjoy the experience.

Good Investing,

Alexander Green

Business/Finance, Economics, Funds, Hospitality/Recreation, investment, investor, Nicaragua, USD

by Alexander Green, Investment U Chief Investment Strategist
Monday, February 6, 2012: Issue #1702

What if you could reach total financial independence in just four minutes a day?

If that sounds unrealistic, stay tuned. Because in the weeks ahead, our panel of experts at Investment U is going to show you exactly how it’s done.  Best of all, it won’t cost you a dime. After all, this service is free.

It’s a shame, really, that the average person graduates from high school and still doesn’t truly understand compound interest, or adjustable-rate mortgages or what a 401(k) is. Far fewer still know how to navigate the world’s treacherous but lucrative financial markets.

Since financial literacy and advanced money management skills aren’t taught in school, many men and women follow a predictable path when it comes to investing.

First, realizing they don’t know enough to risk their saving without potentially making huge mistakes, they turn to a stockbroker, insurance agent or mutual fund salesman for advice.

Not good.  Many people in the financial industry are peddling advice that is pedestrian, self-serving, far too expensive or all three.  Expect to hear these folks tell you, for example, that full-load mutual funds, whole life insurance and high-cost variable annuities are the best things since night baseball.

After a few years, the typical customer realizes that he’s dealing not with a fiduciary but a salesman – and a primary reason he’s not doing well is that his broker is doing too well.

That’s when many investors make their next predictable move. They transfer their account to a discount broker like E-Trade or Charles Schwab.

And while a discounter is a whole lot cheaper than a full-service broker, it quickly becomes apparent that the customer isn’t a professional money manager himself and – truth be told – really doesn’t know that much about what he’s doing.

The typical discount customer ends up with a few winners and a few losers, but doesn’t know when to sell them or why. At the end of the year, he looks at his statement and sees he isn’t much closer to his financial goals – if, indeed, he ever took the time to set any.

This brings many investors (older, wiser and generally poorer) to the conclusion that they do need qualified help, just not from a salesman in a transaction-based relationship.

Eventually, hundreds of thousands of investors turn to Investment U, the free, Web-based source for men and women seeking to achieve and maintain total financial freedom.

Proven Principles Don’t Change

We do something virtually no one else does. Investment U provides daily commentary and analysis about today’s fast-moving financial markets, but always with the objective of tying our advice to timeless investment principles.

Economies expand and contract. Currencies rise and fall. Governments come and go. Markets zig and zag. But proven investment principles don’t change.

Yet the sad fact is that most investors have never learned them. They’re trying to ace Trigonometry without having mastered Algebra 1. Why don’t you have the crucial knowledge you need?  Because schools don’t teach it and telling the unvarnished truth isn’t conducive to selling high-priced financial products.

As Vanguard founder John Bogle likes to say, “It’s amazing how difficult it is for a man to understand something if he’s paid a small fortune not to understand it.”

We don’t have conflicts like that here. We don’t charge commissions or fees. We don’t want to “capture your assets.”

Yes, Investment U offers premium services to subscribers. (We couldn’t support a free e-letter forever if we didn’t.) But there is never any obligation to buy and any purchase comes with a free-trial period and a money-back guarantee.

So stick with us. In the weeks ahead, we are going to reveal big dividend plays, high-yield bonds, undervalued currencies, ultra-cheap commodities, risk-reduction techniques, and proven strategies to prevent losses, protect gains and navigate today’s volatile investment environment.

Best of all, we’re going to do all this with a single goal in mind: To show you the shortest, most direct route to total financial independence.

The only commitment it requires from you is four minutes a day. That’s how long it takes the average reader to finish our daily column.

The service is free. But the knowledge is priceless.

Good Investing,

Alexander Green

Alexander Green, Business/Finance, Derivatives, Discounting, Finance, Financial economics, Funds, Futures contract, Institutional investors, insurance, investment, Investment U, Mutual fund, Risk-neutral measure, Short

Is Your Investment Advisor Capitalizing on Your Fear?

by Alexander Green, Investment U Chief Investment Strategist
Monday, January 16, 2012: Issue #1687

Make no mistake. Investors are petrified right now. And they’re telling their investment advisors about it.

The question is: “What is he or she doing in response?” If the answer is adjusting your asset allocation, focusing on your long-term investment goals, or doing a bit of handholding, you probably have a good one.

But if they’re preying on your emotional state with unsuitable investments or all-or-nothing advice, beware.

The story is as old as equity investing itself. When times are good, investors get complacent, take too much risk and generally regret it. When times are bad, investors become anxiety-ridden, take too little risk and generally regret it. Seasoned advisors know this and try to keep you on the right track. But less knowledgeable or less scrupulous advisors may try to take advantage of your worries.

For instance, your investment advisor may recommend that you load up on variable annuities in this uncertain environment. Not a good idea. Some annuities are right for some people. They offer tax-deferred compounding (like an IRA) and a principal guarantee. But the typical annuity is ridiculously expensive, offers mediocre insurance coverage, restricts your investment choices to so-so mutual funds, lacks liquidity and comes with enormous surrender penalties.

Too many investors learn these things about annuities after they’ve plunked for one. Hence, you’ll often hear investors complain that they are “stuck in an annuity” for several years. Investigate these insurance contracts before you invest. On the whole they are oversold, frequently misrepresented and completely inappropriate for many folks.

Another sign that you have a misguided (or unethical) investment advisor is if he suggests that you abandon proven investment principles. For example, if your investment plan is based on a broker’s economic forecast or market timing advice, good luck. You’re going to need it.

No one can accurately predict the economy with any consistency. And it wouldn’t really matter if they could. Stocks routinely rally during the bad times and sell-off during the good ones. If your investment advisor doesn’t know this, you shouldn’t be using her. If she does and is still trying to convince you to flee the market, that’s even worse.

Also beware investment advisors who are paid on a transaction basis and therefore have an incentive for you to trade more frequently. Some brokers today are telling their clients that the old rules no longer apply, that you need to jump in and out of the market and from stock to stock. For a commission-based broker, this can be entirely self-serving advice. And it is almost certain to end badly… at least for the client.

I know it’s tough to buy – or just hang in there – when the outlook is dark. But look back at history. The market was a screaming “Buy” after the crash of ’87, the bear market of 1990, the tech wreck of 1994, the Asian Contagion of 1997, the 2000 to 2002 bear market, and even during the depths of the financial crisis in 2008.

If you’re using an advisor who insists that “this time it’s different,” you might reasonably examine his experience, his ethics and his disciplinary history. And seek out more-qualified advice.

Good Investing,

Alexander Green

Annuity, Business/Finance, Chief Investment Strategist, Finance, Financial services, Funds, Institutional investors, insurance, investment, Investment advisor, investment advisors, Life annuity, market timing, Mutual fund

Are You Ready for The Evergreen Portfolio?

by Alexander Green, Investment U’s Chief Investment Strategist
Monday, September 13, 2010: Issue #1343

Bill Gross, the top-performing manager of the Pimco Total Return Fund, the world’s largest actively managed mutual fund, says it’s time for investors to accept and start adjusting to “the new normal.”

What’s that?

High unemployment, excess housing capacity, difficult-to-obtain credit and, not least of all, much-lower-than-historic returns from stocks, bonds, real estate and cash.

Sounds depressing. However, some investment advisors aren’t content telling their clients to simply lower their expectations. Two of them are seasoned investors Martin Truax and Ron Miller, Managing Directors at Atlanta-based Morgan Keegan & Company.

Adjusting to the “New Normal” With The Evergreen Portfolio

Truax and Miller point out that “buy and hold” investing and simple diversification haven’t worked over the last 10 years – and it’s hard to disagree. The S&P 500, for example, is no higher than it was in 1999.

Looking forward, they argue that these failed approaches won’t work over the next 10 years either.

Yet there are proven strategies that are likely to produce high returns with an acceptable level of risk. In their new book, The Evergreen Portfolio, out this week from John Wiley & Sons, Truax and Miller invite more than a dozen of the nation’s leading analysts to talk about “the new normal” and make specific recommendations about what investors should do with their money today. (They also reveal their own particular solution: The Evergreen Portfolio itself.)

The book is chock full of interesting and unconventional investment angles. That’s not too surprising when you consider who was involved in this project.

The Evergreen Portfolio: A “Who’s Who” of the Investment World

Contributors to The Evergreen Portfolio include such well-known names as…

• Rick Rule, CEO of Global Resource Investments.
• Dr. Mark Skousen, free-market economist, former Investment U Chairman and current contributing editor, and editor of Forecasts & Strategies.
• Elliott Gue, editor of The Energy Strategist.
• Frank Trotter, currency specialist and president of EverBank.
• Mining specialist Bob Bishop, the longtime editor of Gold Mining Stock Report.
• Bob Prechter, editor of The Elliott Wave Theorist.
• Richard Maybury, publisher of U.S. and World Early Warning Report.

There are many others, including yours truly. (In the interest of full disclosure, I have not received – and will not receive – any compensation from the sale of this book.)

There is a lot of pessimism out there right now about what lies ahead for the economy and stock market. Yet, unlike most investment advisors, Truax and Miller don’t try to convince the reader otherwise. They are convinced that excess consumer debt, weakness in housing, and rampant government spending are creating a very tough environment for investors.

Their advice – and the investment advice of their contributors – is to face up to this new reality and start managing your portfolio effectively to deal with it.

Why You Need to Read The Evergreen Portfolio

The Evergreen Portfolio is written for:

• Investors who want a thorough understanding of “the new normal” and hard-hitting advice about how to protect your assets even in inflationary or deflationary times.
• Businesspeople and other professionals who have been successful in their careers but need a solid foundation for investment success.
• Investors who are unhappy with the performance of their brokers and money managers and want “untainted” investment advice.
• Investors who are overwhelmed with too many investment choices and want an uncomplicated approach to the market.

I’m a contributor to The Evergreen Portfolio, so perhaps I have a positive bias. But the book is the distilled wisdom of more than 15 seasoned investment pros and a thoroughly enjoyable read, full of unconventional ideas and unusual insights.

There will be fortunes made and lost in the months ahead – and, like most readers, I intend to be on the winning side. The Evergreen Portfolio is a survival guide for those who want to protect and build their wealth in the tumultuous years that almost certainly lie ahead.

Good investing,

Alexander Green

P.S. The Evergreen Portfolio is available at bookstores nationwide and is currently discounted 28% on Amazon. For further information on the book, click here.

Business/Finance, Diversification, Finance, Financial economics, Financial markets, Financial services, Funds, investment, Mutual fund, Portfolio

Jeremy Siegel: Treasury Bonds Today Are a Sucker Bet
by Alexander Green, Chief Investment Strategist
Monday, August 30, 2010: Issue #1334

The investment advisory industry is full of gurus – and various charlatans – claiming that they made incredible stock market calls.

But Wharton Professor Dr. Jeremy Siegel made perhaps the greatest call of all time at the right moment and for the right reasons. Those who listened to him saved themselves many thousands of dollars – and untold agony.

Now Dr. Siegel is making another bold prediction. You can only ignore it at your peril. Here’s why…

Siegel Shocks the Market

On March 13, 2000, The Wall Street Journal ran an op-ed piece from Dr. Siegel entitled “Big-Cap Stocks Are a Sucker Bet.” The column shocked the investment community.

Here was the man, author of the investment classic Stocks for the Long Run and who provided the intellectual underpinnings of the greatest bull market in history, claiming that the greatest stock market darlings weren’t just overvalued. They were a “sucker bet.”

Siegel focused on the 33 largest firms based on market capitalization – those with values greater than $85 billion. Of these, 18 were technology stocks. He noted that their market-weighted P/E equaled 126. What’s more, he pointed out that half of the large-cap technology stocks had P/Es over 100. For these stocks, the market-weighted P/E was 208.

These prices were totally unjustifiable. There was no way that these companies could grow fast enough to support such insane valuations.

Are You Heeding Siegel’s Current Warning?

That month, the Nasdaq – home to these tech giants – hit its all-time high of 5,132. From there, it imploded. Many of the stocks he singled out in the column – like Yahoo! (Nasdaq: YHOO) and JDS Uniphase (Nasdaq: JDSU) – plunged over 99%.

Even today – more than 10 years later – the Nasdaq is 60% below its high.

It’s great when a knowledgeable analyst like this rings a clear warning bell at the top. So understand that he’s doing it again today.

Earlier this month, he wrote another Wall Street Journal op-ed piece. This one is called “The Great American Bond Bubble.”

Siegel says: “What is happening today is the flip side of what happened in 2000. Just as investors were too enthusiastic then about the growth prospects in the economy, many investors today are far too pessimistic.”

As a result, they’re plowing money into Treasuries and Treasury mutual funds.

This will almost certainly end badly.

Unless we have a full-blown deflationary depression, these bonds are a horrible bet, offering minuscule yields and huge downside risk. Many investors don’t realize how badly they can get clobbered in super-safe Treasuries when the bond market turns down. (And those holding leveraged bond funds could see 40% or more of their principal vanish in a matter of months.)

As Siegel concludes: “Those who are now crowding into bonds and bond funds are courting disaster… The possibility of substantial capital losses looms large.”

What does Siegel propose that income investors hold instead?

Don’t Be a Sucker: Invest in This Asset Class Instead

Large-cap dividend stocks.

He points out that the 10 largest dividend payers in the United States are:

AT&T (NYSE: T)

Exxon Mobil (NYSE: XOM)

Chevron (NYSE: CVX)

Procter & Gamble (NYSE: PG)

Johnson & Johnson (NYSE: JNJ)

Verizon (NYSE: VZ)

Phillip Morris (NYSE: PM)

Pfizer (NYSE: PFE)

General Electric (NYSE: GE)

Merck (NYSE: MRK)

And together…

• They sport an average dividend yield of 4%, substantially more than what 10-year Treasuries are paying.
• Their average P/E ratio is 11.7 versus 13 for the S&P 500.
• Aside from the mountain of cash they’re sitting on, their prospective earnings will cover their dividends by more than 2 to 1.

Despite fears of another stock market dip, income investors are wise to switch from Treasuries to high-dividend stocks. It might not feel like the right thing to do, but neither did buying stocks at the market low 17 months ago.

In short, I couldn’t agree with Dr. Siegel more. Treasury bonds today are a sucker bet.

Good investing,

Alexander Green

Business/Finance, Finance, Financial economics, Financial markets, Financial services, Funds, jeremy siegel, New York Stock Exchange, P/E ratio, Short, Stock, Stock market, Stocks for the Long Run, Treasury

The Japanese Stock Market: How to Play “The Land of Rising Stocks”

by Alexander Green, Chief Investment Strategist
Monday, June 28, 2010: Issue #1290

The Wall Street Journal reported last week that, for the first time in three years, foreign investors are increasing their holdings in the Japanese stock market.

Data released by the Tokyo Stock Exchange shows that foreign ownership of Japanese shares rose to 26% for the year that ended in March, up from 23.5% a year earlier.

The Journal suggests that a recovery in Japanese corporate earnings is tempting foreign investors back to the country’s equity markets.

But I think there’s more going on here. Perhaps hedge fund managers and other savvy global investors have paged back through their old, dog-eared copies of Dr. Jeremy Siegel’s Stocks for the Long Run.

If so, they may have recognized something significant…

Crunching the Numbers on Japan

Siegel notes that it’s rare for stocks to go 10 years without giving a positive return. Yet we’ve experienced just such a rarity over the last decade.

For stocks to go 20 years without giving a positive return is almost unheard of. And 30 years? That’s rarer than Big Foot, Nessie and the Abominable Snowman combined.

Which brings me back to Japan…

• In 1989, the Nikkei 225 – Japan’s equivalent of the S&P 500 – hit a new all-time high near 40,000. Today, more than 20 years later, it languishes near 10,000 – almost 75% lower.
• In other words, the Nikkei 225 would have to rise 300% just to get back where it was in 1989.

And it wouldn’t surprise me if it did just that by the end of the decade. After all, it’s happened before.

In the 1970s, the U.S. market returned just 0.34% a year – a 3.4% total return for the decade. Yet the Japanese market compounded at 16%, generating a 10-year return of 344%.

What other asset class offers that kind of potential return over the next decade? (Gold bugs, keep your seats.)

Don’t Chase the Bullet Train… Get on Board Now

The groundwork has been laid.

Last August, after more than 50 years, Japan’s opposition party trounced the Liberal Democratic Party in a landslide election.

The new government has promised to shrink the country’s massive bureaucracy and cut wasteful public spending. It also intends to end more than 20 years of economic stagnation by cutting taxes and focusing on small and mid-sized businesses.

Of course, we’re all skeptical of politicians’ promises, but there is evidence that they mean business this time. Twenty years is a long time to leave your economy in a funk.

It’s resulted in Japanese stocks being among the cheapest and most unloved in the world. Virtually no one is enthusiastic about the Tokyo market.

However, great opportunities are born when dirt-cheap valuations marry investor apathy. Plus, Japanese investors are flush with cash. They’ve largely ignored domestic stocks after two decades of sub-par returns. And as that money begins to find its way out of mattresses and back into Japanese equities, the Tokyo market should lift off.

This is doubly true when institutional money managers return to Japan in a serious way. For years, global fund managers have outperformed the world benchmark by simply underweighting Japan. But let the Shinkansen take off without them and they will be forced to dash after it.

So how do you play this?

Two Ways to Ride the Japanese Stock Market

There are dozens of worthwhile Japanese ADRs trading on Nasdaq and the Big Board.

But you can gain exposure to the Japanese stock market through two ETFs…

• iShares MSCI Japan Index (NYSE: EWJ), which invests in large-cap Japanese stocks.
• Wisdom Tree Japan Small-Cap Dividend Fund (NYSE: DFJ), which captures the best of the Japanese small-cap sector.

Or you can spread your bets and own both.

Incidentally, if you remain skeptical about Japanese stocks digging their way out of this 21-year hole, consider again how unlikely it is that Japanese stocks will earn a negative 30-year return.

As Dr. Siegel writes in Stocks For the Long Run:

“In the 12 years from 1948 to 1960, German stocks rose by over 30% per year in real terms. Indeed, from 1939, when the Germans began the war in Poland, through 1960, the real return on German stocks matched those in the United States and exceeded those in the U.K. Despite the total devastation that the war visited on Germany, the long-run investor made out as well in defeated Germany as in victorious Britain or the United States. The data powerfully attest to the resilience of stocks in the face of seemingly destructive political, social, and economic change.”

The story in Japan was similar. By the end of 1945, stock prices stood at about approximately one-third of their level just prior to the Empire’s surrender. Over the next 40 years, the Japanese market returned more than 20 times its American counterpart.

If 200 years of world stock market history is any guide, the current decade should be another barnburner for Japan.

Good investing,

Alexander Green

asset allocation, Business/Finance, Economics, Finance, Financial economics, Financial markets, Financial services, Funds, investment, Japan, jeremy siegel, Stock, Stock market, Stocks for the Long Run

Treasury Funds: Get These Time Bombs Out of Your Portfolio

by Alexander Green, Chief Investment Strategist
Monday, June 21, 2010: Issue #1285

Tens of millions of investors have a ticking time bomb in their fixed-income portfolios.

Are you one of them? If so, there’s still time to defuse it.

A few weeks ago, I wrote an Investment U column entitled, “Why the Safest Investment is Now One of the Riskiest.”

I noted that investors – frustrated by the microscopic yields on money market funds and certificates of deposit (CDs) – have poured money into longer-term Treasury funds.

Their thinking is simple. Too simple: “These funds yield over 5%, not bad in this environment, and the bonds they hold are guaranteed by the full faith and credit of Uncle Sam. What’s to worry about?”

Plenty…

Aren’t Treasury Funds Free of Risk?

Unlike individuals, corporations, and municipalities, the federal government can simply create money to meet any obligations. U.S. Treasuries are thus free of credit risk. But they aren’t free of interest-rate risk.

When interest rates go up, Treasury bond prices go down. Yet investors are comforting themselves that inflation isn’t currently a problem and that long-term rates remain near historic lows.

Don’t be fooled. There is a monster on the horizon – and he makes Beowulf’s Grindel look like Barney.

• Over the past 18 months, the federal debt has surged from $5.5 trillion to more than $8.6 trillion.
• Two years ago, it was 38% of GDP. Today, it’s 59% of GDP. And by the Congressional Budget Office’s own estimates, it’s going much higher still.

This is dangerous. Yet inflation has remained remarkably subdued so far. But understand that if the government opts to stimulate the economy further – especially if some emergency action is needed – short-term rates are already at zero.

Having already thrown the kitchen sink at the slowdown from a monetary standpoint, the federal government will almost certainly opt to spend even more dramatically.

The bond markets will not take this news well. Long-term rates are likely to spike. And when they do, it will get real ugly, real quick.

Investors always think they have time to move out of longer obligations before that happens. But that is not likely to be true…

The Triple Threat to Treasury Funds

Between early October 1979 and late February 1980, for example, the yield on the 10-year note rose almost four percentage points, driving a stake through most people’s bond portfolios.

Making matters worse, millions of Mom-and-Pop investors have unwittingly plunged into leveraged bond funds in recent years, often on their brokers’ recommendation.

Leveraged bond funds borrow money in the short-term to buy more longer-dated issues and enhance the funds’ yields. This is all well and good when rates are flat to lower. But when rates spike higher, look out below. The same thing will happen to these funds as to a margined stock portfolio in a correction.

In fact, leveraged closed-end bond fund investors could get hit with a triple-whammy…

• The bonds in the fund will drop when interest rates rise.
• The drop will be compounded by the fact that the portfolio is leveraged.
• The fund could plunge to a deep discount to its net asset value, too.

Become a Bomb Disposal Expert… On Your Portfolio

Not pretty. So what to do?

• First, check to see what percentage of your portfolio is in long-term bonds. It shouldn’t be more than 10% as a maximum (as protection against a deflationary scenario).
• Second, visit www.etfconnect.com and type in the symbols for your fixed-income ETFs or closed-end funds.

Then look at the number beside the fund’s “effective leverage.” Zero means the fund is unleveraged. But some may be leveraged up to 40% or more. (That’s how these funds are able to yield more than the bonds they invest in, even after expenses.)

In sum, this is a time to pare back your long-term bond holdings and eliminate most of your leveraged holdings.

Don’t take these words lightly. There is danger on the horizon. But if you act now, there’s still time to get that ticking time bomb out of your portfolio.

Good investing,

Alexander Green

Bonds, Business/Finance, Economics, Finance, Financial economics, Funds, Global Treasury Funds Plc - Sterling Fund, Interest, Interest rate, investment, Money fund, Portfolio, Subprime mortgage crisis, United States Treasury security

Do Trailing Stops Really Work?

by Alexander Green, Chief Investment Strategist
Monday, June 14, 2010: Issue #1280

While I was in Baltimore last week, one of our Oxford Club researchers, Matt Carr, told me over lunch that one of the most controversial aspects of our investment policy is trailing stops.

But they shouldn’t be.

If you don’t have a premeditated sell discipline – and the vast majority of investors don’t – you’re flying by the seat of your pants. And that rarely leads to superior investment performance.

But do trailing stops really work?

Survey Says: Use Trailing Stops

In a word: Yes. Trailing stops protect your profits and your trading capital. And there’s much more than just anecdotal evidence.

In a study published in The Journal of Portfolio Management, Christophe Faugere, Hany A. Shawky and David M. Smith – finance professors at the State University of New York at Albany – researched the performance of money managers who oversee pension funds, endowments and high-net-worth accounts.

Because most institutions work under strict investment guidelines, these academics were able to analyze performance based on differing approaches to selling stocks.

The result? Institutional managers who fared best were those with restrictive rules that didn’t allow much leeway for holding stocks for emotional reasons. Managers who relied on “flexible” sell strategies did far worse.

Count me as unsurprised. Institutional money managers are just as prone to rationalizing as individual investors when they make a mistake. (Hence the old Wall Street chestnut, “What does a broker call a trade gone wrong? A long-term investment.”)

Trailing Stops: Providing Protection… Securing Profits

The culprit is almost always pride, ego, or emotion. Without any kind of sell strategy, emotions come into play. And emotions are almost always wrong.

But by adhering to a disciplined trailing stop strategy, our Oxford Club investment system mows down emotion-driven trading errors like a field full of dandelions.

It cures greed. Eliminates fear. And does away with wishful thinking – as in, “I hope this stock turns around and starts going the right way.”

Of course, trailing stops aren’t the only sell discipline out there. But they’re one of the easiest to implement. They serve two purposes…

• They make sure we never let a small loss become an unacceptable loss.
• They keep us from selling stocks while they’re still trending up.

According to the independent Hulbert Financial Digest, over the past 10 years our Oxford Club portfolios have beaten the S&P 500 by a wide margin. Part of our success has come from diligent research and careful stock selection. But part has also come from cutting our losses and letting our profits run.

Maneuver Past the Market Makers With TradeStops.com

The one knock against using trailing stops is that unscrupulous market makers will sometimes take out your stop order right before a stock takes off.

But Richard Smith, President and Founder of TradeStops.com – and a PhD in mathematics – has a service that provides an ingenious solution.

If you visit www.tradestops.com, you can enter the stocks you own, the price you paid and the percentage trailing stop you want to use. There are several valuable benefits…

• If any of your stocks close beneath your selected stop, TradeStops sends a message – to your cell phone, e-mail, or account page – alerting you.
• Some brokerage firms, like Fidelity, offer trailing stop alerts with their accounts. But they generally expire after 30 or 60 days. TradeStops information never expires and even offers a 30-day risk-free trial.
• You can track up to 50 stocks at a time. (And whenever you stop out of one, you can replace it with another.)
• TradeStops is easy to use. It’s specifically designed for technophobes.
• It’s reasonably priced. Ordinarily, the cost is $7.95 a month or $79.50 a year. (If you’re an Oxford Club member, you get a special rate of $39.95 a year.) There are additional services available for dedicated short-term traders who want even more.
• It’s important to note that TradeStops notifies you of stops, not your broker. And it doesn’t enter sell orders. But the key is to make sure you have an acknowledged point where you’d be willing to sell any individual stock.

Trailing stops don’t just offer to cut your losses and protect your profits. They guarantee it.

Good investing,

Alexander Green

Editor’s Note: Much of what it takes to become a successful investor comes down to knowing the best times to buy and sell. Some investors rely on technical analysis; others pinpoint fundamentals. But regardless, trailing stops are essential to protect yourself from a volatile, unforgiving market.

Adhering to a disciplined trailing stop policy is just one of the core wealth-building strategies that has made The Oxford Club one of the most of the most successful investment publishers. In fact, over the past decade, the independent Hulbert Financial Digest has ranked The Oxford Club’s Communiqué as one of the top five investment newsletters.

So if you want to take all the guesswork out of the buying/selling process and let the Oxford Club analysts do the work for you, then consider becoming a member. For $79, you’ll receive an entire year’s worth of stock recommendations, with instructions on when to buy and when to sell for maximum profits. (You’ll also be eligible for the special TradeStops rate mentioned above, too). Take a look at the full list of Oxford Club membership benefits.

Business/Finance, Finance, Financial economics, Financial services, Funds, investment, Order, Oxford Club, Stock market

Timing the Market: If Only You Knew What Mark Hulbert Knows…

by Alexander Green, Chief Investment Strategist
Monday, April 26, 2010: Issue #1246

For over a decade, I’ve been telling readers that timing the market isn’t just unhelpful… it actually hurts performance.

Now the evidence is even more definitive…

Sure, it’s easy to look back and see exactly when you could have been in or out of the market for maximum performance. That’s the beauty of hindsight.

But when you look ahead, things get a whole lot cloudier. So if you’re even thinking about jumping in or out based on some guru’s system or “market outlook,” listen up…

Trying to Time the Market? Don’t Do It!

The Journal of Financial Economics, an academic journal, recently published a new study – “Measuring Investor Sentiment With Mutual Fund Flows.”

Using easily available public information published by the Investment Company Institute, a mutual fund trade organization, the researchers focused on investor exchanges out of stock funds into bond funds and vice-versa.

This led to an interesting discovery…

• The research shows that market timers, as a group, have god-awful instincts. In fact, you could hardly find a better investment system than to do EXACTLY THE OPPOSITE of what they’re doing.
• The researchers built a hypothetical portfolio going all the way back to 1984 and switched back-and-forth between the S&P 500 and 90-day T-bills. They did the mirror opposite of what mutual fund flow figures showed switchers were doing.
• Over the next 25 years, the portfolio produced an annual return of 12% – 1.6% a year better than merely buying and holding the S&P 500.

To put this in concrete terms, buy-and-holders turned a $10,000 initial investment (with dividends reinvested) into $118,639 over the period.

Those who did the opposite of mutual fund timers, however, turned the same $10,000 into more than $170,000. (Most fund switchers, on the other hand, did about as well as someone betting on black or red at the roulette wheel.)

That’s not the best part, however…

An Impressive Performance… For Serious Contrarians Only

What makes these numbers even more impressive is that the contrarian portfolio took on far less risk than being fully invested in stocks. After all, it was invested in riskless T-bills nearly half the time.

I’m not actually recommending that you follow this strategy, incidentally. For one thing, past performance – as every investment prospectus reminds you – does not guarantee future results.

Plus, 25 years as a portfolio manager and investment writer have proved to me that the overwhelming majority of investors lack the emotional discipline to invest contrary to the crowd. (So when the chips are down, you may still be out.)

As Mark Hulbert, editor of the independent Hulbert Financial Digest, concludes, the average investor “would be far better off if he never engaged in market timing.”

The Oxford Club doesn’t. And it shows in our results…

A Top Five Ranking for 10 Years Running

Of course, every newsletter editor brags that his investment letter gives superior returns. The industry bears an uncanny resemblance to Lake Wobegone, where “all the women are strong, all the men are good-looking and all the children are above average.”

It’s worth noting, however, that Hulbert ranks The Oxford Club Communiqué among the top five letters in the nation for risk-adjusted performance over the past 10 years.

That allows us to give entirely honest answers to the two most commonly asked questions:

• “How has your investment advice worked out?” – Beautifully.
• “What do you think the market will do next?” – We haven’t the foggiest notion.

Good investing,

Alexander Green

Editor’s Note: Are you trying to time the stock market? Don’t! There’s a better way to tackle the investing process: let some of the best, most successful analysts in the business do the work for you.

The Oxford Club’s pragmatic, “market neutral” approach has generated consistent, impressive results for many years, based on real facts, information and numbers that matter, not arbitrary stock market indicators or timing.

For more details on how you can profit from the stocks in The Oxford Club’s Communiqué portfolio, please visit this link. You’ll see why the Hulbert Financial Digest has ranked the Communiqué in the top five investment newsletters over the past 10 years and get the latest investing ideas, insights and recommendations that can make you money for the next year and beyond.

Business/Finance, contrarian investing, Finance, Financial economics, Financial services, Funds, investment, market timing, Mutual fund, Portfolio, Rate of return, Socially-responsible investing, Stock fund