Category Archives: fixed income investment

Creating a Blended Portfolio of Growth and Value Stocks

Posted on April 17, 2012 by admin

There are big differences in the theories behind growth and value , and big differences in the psychology behind those who invest in either manner.  Rather than choose one, many people build a portfolio that combines the best of both worlds.  Have part of the portfolio based in growth stocks that will provide a rapid increase in portfolio worth.  But at the same time, have a portion of the portfolio in value stocks that will stay the course for the long-term bringing in dividends. A blended growth and value portfolio is not the same as adding bonds to a portfolio.  A growth and value blended portfolio will have more volatility than a portfolio that contains bonds.  It will still capture the ups and downs of the stock market, and might still be too aggressive for many investors.  It will capture the rapid upward movement of growth stocks and store money in value stocks.  If the market drops, however, the portfolio is not safe from downward movement. To build a blended portfolio, you need to assess your risk tolerance.  A higher risk tolerance will want more money invested into growth stocks, a lower (still scoring above balanced) score will want less invested in growth.  An aggressive investor will want to look at taking about 70% of their portfolio, and investing it in growth stocks.  The remaining 30% will be invested in value stocks.  Theoretically the growth stocks will increase in price much faster than the value stocks, leading them to make up more of the portfolio.  When this happens the investor should rebalance to maintain the 70% growth 30% value.  Essentially he or she is capturing the upticks in with the growth, and then moving the money to be stored in the value stocks. With a blended portfolio (or any portfolio), you need to pay attention to what is going on.  During a year when the growth stocks (or value stocks) perform exceptionally well, the portfolio can quickly get out of balance.  Make a note on your calendar to rebalance every 6 months or so.  As long as you’re comfortable with the allocation between growth and value, don’t consider rebalancing more than twice a year.  If you find yourself worried about your allocation, you may want to consider a less volatile portfolio and increase the percentage of bonds in your portfolio. The blended investment can be a great way for those who want to take risk, capture, and store their returns.  It can be great for those who do not mind a taking risk to capture gains.  It is not good for those who need the safety of bonds or other fixed income investments.  If you have what it takes to pay attention, this type of portfolio can be build out of individual issue stocks.  But the easier way is to have it all built out of mutual funds , many of which will do the heavy lifting for you.  For even closer attention, hiring a financial advisor may be the way to go. Continue reading →

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Creating a Bond Ladder

Posted on December 12, 2011 by admin

In today’s low interest rate environment, investors should think that it’s time to start climbing the ladder – the bond ladder, that is.  A bond ladder allows an investor to stagger fixed income investments over time to lock in progressively higher rates from bond offerings as they become available.  As individual bond offerings mature, the funds are reinvested in new bond offerings.  This strategy is one of the primary tools used by money managers and financial advisors who manage fixed income portfolios for their clients, as well as experienced personal investors. How Bond Ladders Work Bond ladders are one of the most straightforward types of investment strategies.  One approach to creating a bond ladder is to invest a certain amount in a specific type of bond every at a particular interval.  For example, you decide to create a bond ladder by investing $10,000 dollars every six months in certificates of deposit (CDs) with a two-year maturity.  Every six months, you invest $10,000 in a new CD with a two-year maturity.  At the end of two years, you will have invested $40,000 that will be earning the average rate on two-year CDs over that time.  Furthermore, your first CD matures at the end of two years and you can roll over the principal to purchase another two-year CD.  Because you are only investing 25% of your portfolio every six months, your portfolio will be less sensitive to increases and decreases in the interest rate on your bonds.  If you have $40,000 today, you could also set up an initial ladder with a $10,000 CD that matures in 6 months, a  $10,000 CD that matures in 12 months, a $10,000 CD that matures in 18 months and a $10,000 CD that matures in 24 months.  As each CD matures, you then reinvest in the principle in a new CD with two-year maturities. You can create a bond ladder out of any fixed-length CD or bond.  You could construct a ladder with five-year or ten-year maturities.  A CD at a bank is guaranteed up to $250,000 by the FDIC.  You could also create a bond ladder out of US Treasury Bonds that bear the risk of the US government.  Sophisticated investors may want to consider looking at the inventory of corporate bonds.  Note that corporate bonds carry risk and if the company defaults, an investor will likely lose some or all of the invested principal.  Of course, these examples merely illustrate a concept that has a great many variations, depending upon the skill level, risk tolerance and time horizon of the investor.  Discipline and patience are critical for setting up a bond ladder.  For more information on bond laddering, consult your financial advisor. Continue reading →

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Fixed Income Investment Yield Shopping: the Most Expensive Shopping You’ll Ever Do

Posted on December 8, 2011 by admin

In an environment of what seems a perpetually low interest rates, what is an investor looking for income to do? A recent cover story in Barron’s Magazine “How to Get Safe Annual Payouts of 7%”  illuminates some of  today’s challenges in the fixed income investment world and offers that “Yields of 5% and 7% are attainable, but you have to look globally and across asset classes that may seem unfamiliar, such as emerging-market bonds, global infrastructure stocks, master limited partnerships and mortgage real-estate investment trusts.” To be sure the author adds that while “some risks are obvious…more often risk is difficult to spot.” After more than twenty years in the finance and investment arena, I feel compelled to add:  Caveat Emptor. I am continually amazed at the number of investors who only ask one question when it comes to potential fixed income investment selections:  What is the yield?   What I am even more amazed at is the response if the yield does not meet an investor’s perceived needs. Worse still, many fixed income investment proponents are over allocated to just one or a few holdings, as they have been taught to avoid bond mutual funds. Income investors need to keep the perspective that for every $100,000 invested a full percentage point yields an extra $1,000 per year.  On a monthly basis that works out to $83 a month. While I have no way of quantifying it, I would venture to say that an exponentially greater amount of money has been lost than gained when reaching for incremental amounts of yield. For some recent examples just Google the following: Ultra short bond funds, Auction Rate Preferred Securities and the First Reserve Money Market Fund. Even more horrifying is that these disasters occurred when investors/money managers were reaching for maybe an extra 25 basis points of yield.  So for every $100,000 the extra risk (which proved ruinous) brought in about $20 a month. Income investors should ask themselves the same thing all investors should ask.  What is the potential total return in relation to the risk? For investors who have to have the income to pay the bills, it may be better to drawdown a small portion of principal than to risk a bigger chunk of it in hopes of higher yield. Absent the stomach to drawdown some principal, the fixed income investor needs to be sure that he or she is utilizing a prudent allocation to higher yield (and risk) investments. This may require the use of a bond fund, but as I discussed in “Bond Ladders vs. Funds,” here it just might be the best option. Continue reading →

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