One of Jeff's most popular series on A Dash of Insight has been The Quest for Yield. In this series, he tackles a number of subject relevant to the needs of the individual investor.
In the first installment, Jeff highlights the principle of "total return" as a key model for investors.
"Retirement investing is not about fixed income. It is about total return and risk control. Each investor is different in terms of needs, current assets, and risk tolerance.
I want to emphasize that this series (like all of my work) is not intended as individual investment advice. You mileage may vary! Having said this, nearly everyone who comes to me is trying to squeeze income out of low-yielding instruments or reaching for yield by taking a big risk. Most do not understand the total return concept. They are under-invested in stocks. They have been scared silly by 2008, the flash crash, the political circus, and the media.
Their solution is to reach for yield in things that seem appetizing, without realizing the essential nature of risk and reward."
The second article deals with the strategic allocation of assets within an individual portfolio.
"If you have all of the money you need -- good retirement, provision for heirs, etc. -- you should be absolutely certain to set aside enough to guarantee what you have already earned. There is nothing sadder than needless risk.
For others -- and that is most of us -- it is a balancing act.
- If someone has a rigid formula about stocks versus bonds, regardless of the relative valuations, that is a mistake. Let's get serious. If bond yields right now were 15% or so, the way they were in the 70's, many of us would lock in and sit back to enjoy.
- If option volatility is really high, why wouldn't we want to enjoy the benefits of selling some option premium?
- If corporate bond yields are especially attractive compared to treasuries and stocks, it is time to move.
There are no absolute answers. You should consider multiple strategies, your own needs and your own risk tolerance. Find the balance that is right for you!"
In the third post, Jeff focuses on the importance of dividends.
"When leading investment gurus say, "Why own a bond when you can own stocks?", they are often comparing the dividend yield of some stocks with the yield of the long-term bonds in the same company.
A wise investor, embarking on a quest for yield, should carefully compare the bond yield of top-rated companies with the dividend yield. In many cases owning the stock is a better choice."
The fourth article involves a dicussion of covered writes as they relate to the individual investor.
"Many yield-oriented investors miss out on one of the single best method for generating income: Selling calls against their stock positions.
Options trading can be frightening for beginners. After the 1987 market crash, the rules about disclosure and suitability were tightened up. To qualify for options trading the investor must demonstrate some knowledge and experience. These rules are good, but a little study can give you the knowledge and confidence you need."
The fifth post relates to the best way for the individual investor to build his or her own income portfolio.
Let us suppose that you are a risk-averse investor with a ten-year (or longer) time horizon. There are various high-yield bonds, but they also have high risk. At the time I am writing, investment grade corporate bonds(ten years) yield 3.3% and the equivalent Treasury note is under 2.2%.
Here is the qualification test -- hardly anyone can pass it!
You cannot look at your brokerage statement, the daily mark-to-market, the monthly mark-to-market, or anything else forten years.
This is what you would do with a bond portfolio. You buy expecting to collect the coupon and the principal at maturity. It is a simple test, yet a difficult one. The bond investor does not worry about daily marks.
In the sixth post, Jeff writes on the subject of dividend stocks.
"The combination of dividends and call premium will yield 10% returns +/- whatever happens to the stock. If your time frame is a few years, and your stock picks are reasonable, you need only break even on the stocks to get a return that will solidly beat bonds and inflation. On a total return basis you can aim to double your portfolio in eight years or so, without getting unduly aggressive.
This is a sweet spot for many investors. You can do it, but it will take a little work. I have already covered several key topics in prior articles in this series. You will do best if you check out the past articles as well as this one. If you want this to work, don't cut corners!"
The seventh and most recent post in the series is on the topic of investments in bond funds.
Whenever you buy a bond, the price is determined by current yield. If interest rates move higher, the bond price must go lower to generate the new market yield.
Anyone who does not understand this relationship should not own a bond fund. You can get badly burned. One of my best friends owned bonds on the 70's when rates spiked. He lost a fortune and explained that he would never buy bonds again. (This was before my investment advisor days.) We can all see that it was the wrong lesson. Bonds were a great investment just at the moment he was selling! It is pretty much the opposite of the current market.