Best of the Week
Most Popular
1.UK General Election BBC Exit Polls Forecast Accuracy - Nadeem_Walayat
2.UK General Election 2017 Seats Final Forecast, Labour, Conservative Lib-Dem, SNP - Nadeem_Walayat
3.UK General Election 2017 Forecast: Conservative 358, Labour 212 Seats - Nadeem_Walayat
4.Theresa May to Resign, Fatal Error Was to Believe Worthless Opinion Polls! - Nadeem_Walayat
5.UK House Prices Forecast General Election 2017 Conservative Seats Result - Nadeem_Walayat
6.The Stock Market Crash of 2017 That Never Was But Could it Still Come to Pass? - Sol_Palha
7.[TRADE ALERT] Write This Gold Stock Ticker Down Now - WallStreetNation
8.UK General Election Results Map 2017 vs 2015 vs Opinion Polls - Nadeem_Walayat
9.Orphaned Poisoned Waters,Severe Chronic Water Shortage Imminent - Richard_Mills
10.How The Smart Money Is Playing The Lithium Boom - OilPrice_Com
Last 7 days
Gold Back With A Vengeance As Bitcoin Bubble Bursts - 26th Jun 17
Crude Oil Trade & Nasdaq QQQ Update - 26th Jun 17
Gold and Silver Ongoing Consolidation May End Soon - 25th Jun 17
Dollar May Become “Local Currency of the U.S.” Only - 25th Jun 17
Sheffield Great Flood of 2007, 10 Years On - Unique Timeline of What Happened - 24th Jun 17
US Stock Market Correction Could be Underway - 24th Jun 17
Proof That This Economic Recovery Narrative is False - 24th Jun 17
Best Cash ISA for Soaring Inflation, Kent Reliance Illustrates the Great ISA Rip Off - 24th Jun 17
Gold Summer Doldrums - 23rd Jun 17
Hedgers Net Short the Euro, US Market Rotates; 2 Horsemen Set to Ride? - 23rd Jun 17
Nether Edge By Election Result: Labour Win Sheffield City Council Seat by 132 Votes - 23rd Jun 17
Grenfell Fire: 600 of 4000 Tower Blocks Ticking Time Bomb Death Traps! - 22nd Jun 17
Car Sales About To Go Over The Cliff - 22nd Jun 17
LOG 0.786 support in CRUDE OIL and COCOA - 22nd Jun 17
More Stock Market Fluctuations Along New Record Highs - 22nd Jun 17
Understanding true money, Pound Sterling must make another historic low, Euro and Gold outlook! - 22nd Jun 17
Green Party Could Control Sheffield City Council Balance of Power Local Election 2018 - 22nd Jun 17
Ratio Combo Charts : Hidden Clues to the Gold Market Puzzle - 22nd Jun 17
Steem Hard Forks & Now People Are Making Even More Money On Blockchain Steemit - 22nd Jun 17
4 Steps for Comparing Binary Options Providers - 22nd Jun 17
Nether Edge & Sharrow By-Election, Will Labour Lose Safe Council Seat, Sheffield? - 21st Jun 17
Stock Market SPX Making New Lows - 21st Jun 17
Your Future Wealth Depends on what You Decide to Keep and Invest in Now - 21st Jun 17
Either Bitcoin Will Fail OR Bitcoin Is A Government Invention Meant To Enslave... - 21st Jun 17
Strength in Gold and Silver Mining Stocks and Its Implications - 21st Jun 17
Inflation is No Longer in Stealth Mode - 21st Jun 17
CRUDE OIL UPDATE- “0.30 risk is cheap for changing implication!” - 20th Jun 17
Crude Oil Verifies Price Breakdown – Or Is It Something More? - 20th Jun 17
Trump Backs ISIS As He Pushes US Onto Brink of World War III With Russia - 20th Jun 17
Most Popular Auto Trading Tools for trading with Stock Markets - 20th Jun 17
GDXJ Gold Stocks Massacre: The Aftermath - 20th Jun 17
Why Walkers Crisps Pay Packet Promotion is RUBBISH! - 20th Jun 17

Market Oracle FREE Newsletter

The MRI 3D Report

How to Build a "Stockless" Investment Portfolio

Portfolio / Investing 2011 May 19, 2011 - 06:20 AM GMT

By: Money_Morning

Portfolio

Best Financial Markets Analysis ArticleKeith Fitz-Gerald writes: I've lectured on investment strategies the world over, but I recently got one of the most intriguing questions I've been asked in a long time at the Global Currency Expo in San Diego, California.

An attendee asked me: "Is it possible to achieve decent performance if I don't want to include stocks?"


In short, the answer is "yes" -- though I wouldn't recommend a "stockless" portfolio because of the tradeoffs involved.

Still, it is possible to achieve a "decent" performance without stocks.

Here's how you'd do it.

A successful allocation model for a stockless portfolio would look something like this:

•Bonds: 45%
•Master Limited Partnerships (MLPs): 25%
•Commodities: 10%
•Gold: 10%
•Preferred Stocks: 10%*

*You could argue that these are actually stock investments and I would take your point. But for purposes of our discussion and our objectives of achieving stock-like returns, I think we need to include preferred stocks because of the high, fixed dividend they kick off that makes them more bond-like.

We'll take an in-depth look at the allocation model in a moment. But let's examine the negative points of a stockless portfolio first.

Stockless Portfolio Tradeoffs
There are negative aspects to owning a stockless portfolio.

To begin with, the U.S. Federal Reserve's loose monetary policy right now is bullish for stocks, so by forgoing equities, you'd be missing out on some big potential gains. At the same time, you'd be exposing yourself to more volatility and greater risks. You'd also miss out on some hefty dividend payouts.

Here's what I mean.

•The Fed's Zero Interest Rate Policy -There are obviously going to be wiggles along the way, but generally speaking, the Fed's bailout policies should continue to factor into higher earnings, higher cash stockpiles, and continued reinvestment. That, in turn, suggests stocks are still the place to be - at least until something changes inside the Beltway.
•Volatility - Investors who eliminate stocks and refocus their efforts on other asset classes are introducing additional risks to their portfolio. The reason for that is very simple: By taking stocks out of the picture and putting a greater emphasis on the remaining asset classes, investors are reducing the amount of diversity and balance necessary to maintain stability. That makes their portfolios a lot more volatile.
•Lack of Dividends - While avoiding stocks may make you feel better, there's a good chance you'll be left behind - especially if you cut out dividend producers. Let me give you an example. Dividends are likely to grow at an annualized rate of 10% to 12% over the next five years. That means the effective yield on a portfolio that presently yields 1.9% will see its yield grow to 3.4% in five years, according to Don Kilbride, who manages the $5.72 billion Vanguard Dividend Growth Fund (MUTF: VDIGX). If you're not along for the ride, you'll have to make up this money somewhere else. It's also one more roadblock you don't need in a low interest rate environment.
•Out of the Frying Pan, Into the Fire - In their rush to avoid risk by removing stocks from the equation, investors simply may be trading one set of risks for another. That is, bonds aren't necessarily a safer investment than stocks. Bond values will fall dramatically when interest rates begin to rise in earnest, and that actually may be a rougher ride than the corresponding rodeo we'll see in equities.
•You'll have to save a LOT more - By cutting stocks from your portfolio you'd be eliminating a powerful upside. This in turn means you'd have to dramatically increase your savings to make up the difference. In fact, a 32-year old earning $50,000 a year who wants a targeted income of $3,125 a month in retirement would have to increase their savings from 12% to 16% of their annual salary, according to Money Magazine's Walter Updegrave. That translates into an extra savings of $167 a month to make up for the lost value -and that's on top of the $500 a month already going to retirement accounts in his projections. Jumping from 12% to 25% would require an extra $542 a month.

Building a Stockless Portfolio
Now that you're aware of the risks, we can take a closer look at our stockless portfolio asset allocation model.

Bonds: 45%

When it comes to bonds, the key is choosing funds with durations of seven years or less. That will avoid most of the volatility expected to arise when rates start to go up and bond prices start to fall. (Bond prices and interest rates go in opposite directions, so when one is falling the other is rising.)

I suggest splitting your money between high-yield corporate bonds and intermediate- to short-term investment grade municipal holdings.

The former are less likely to bounce around than Treasury or mortgage bond alternatives even if rates rise. They also allow you to keep at least some exposure to the underlying companies that issue them, if only by proxy. The iShares iBoxx $ High Yield Corporate Bond (MUTF: HYG) is a great way to get started here, and it's hard to beat the 7.84% yield.

As for the latter, fears of a meltdown in municipal bonds remain overblown. The historic default rate for investment grade munis from 1970-2009 is 0.06% within 10 years of issuance, according to Moody's Corp. (NYSE: MCO). That's not to say things won't heat up as rates rise and cash flow tightens further. But general obligation bonds backed by near-complete taxing power are probably going to do just fine, as opposed to specific project bonds like the monorail system Las Vegas tried to finance with high yield munis.

I think the PIMCO Municipal Income Fund (NYSE: PMF) is appealing because of the consistent returns it's demonstrated since 2003. Right now the fund yields 7.4%.

Gold: 10%

At the risk of sounding like a broken record, you want to own gold as a means of hedging the principal value of your bonds and your income stream. In a portfolio where bonds are even more important, like the stockless one we're considering today, this is especially crucial as we enter what could be a protracted rising rate environment. While there are all kinds of ways to own gold, most investors will find it easy to get started with the SPDR Gold Trust (NYSE: GLD).

Master Limited Partnerships (MLPs): 25%

Master limited partnerships may trade like stocks, but technically speaking they're a different vehicle and therefore qualify for our hypothetical stockless portfolio. Most investors are at least somewhat familiar with these investment vehicles because of the large number of resource-related MLPs. But you may not be aware of some other choices here, such as The Blackstone Group L.P. (NYSE: BX) and Fortress Investment Group LLC (NYSE: FIG).

The key is that MLPs typically pay regular quarterly distributions that can help boost your income, making up for the gains you have given up by moving away from stocks. However, make certain to talk with your tax professional before you purchase an MLP because they can also kick off unrelated business income (and losses). That may make this type of investment better suited for taxable accounts, rather than tax-advantaged alternatives like IRAs or 401ks.

Investors might also consider Niska Gas Storage Partners LLC (NYSE: NKA). It was recently beaten down after an analyst downgrade, but I like the 6.7% yield and its turnaround prospects.

Commodities: 10%

Right now there's a lot of talk about demand for commodities slowing down. Don't believe a word of it.

Demand is accelerating, and when it comes to such basics as food and water, there are no replacements. For food-related commodities, try the MarketVectors Agribusiness ETF (NYSE: MOO). And those wishing to get their hands on resources may want to consider the Pimco Commodity Real Return Fund (NYSE: PCRDX). Both make a nice inflation resistant hedge, too. Yield on the former is 0.58%, while yield on the latter is 8.45%.

Preferred Stocks: 10%

As I said earlier, you could argue these are actually stock investments, and I would take your point. But for purposes of our discussion and our objectives of achieving stock-like returns, I think we need to include preferred stocks because of the high, fixed dividend they kick off that makes them more bond-like. I don't think you can get any more plain vanilla than the iShares U.S. Preferred Stock Index Fund (NYSE: PFF), which yields about 7.3% at the moment.

So, if you're determined to pursue a stockless portfolio, this should help get you started. But remember, abandoning equities will increase your risk and lower your portfolio's overall returns. So as far as investment strategies go, I'd advise you to stick with stocks - if only for the dividends.

[Editor's Note: There is a way for you to double your money in the next 12 months - and you don't have to hire a Swiss banker to do it.

All you need is the right blend of high-yielding investments - and the right team of financial experts.

And you can get both right here.

This amazing profit opportunity is the latest offer from the global investing gurus with our monthly affiliate, The Money Map Report.

With investors today facing as much market uncertainty as ever, the Money Map team is constantly hunting for the best investments to share with you. Those recommendations, along with our special report on how to double your money, can be yours. Click here to read more.]

Source :http://moneymorning.com/2011/05/19/...

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife