Monday, March 19, 2018

Learn From My Stupid

A couple years back, I moved some of my maturing bonds into various high yielding stocks.  You should always keep track of how the stocks are doing; far more important than for stock mutual funds.  A number have dropped in value because rising bond yields made them less advantageous.  A few that paid handsome dividends (like Frontier Telephone: FTR), no longer pay a dividend.  A couple of the stocks that are technically partnerships have disappointing returns that make the annoying paperwork of Schedule K-1 at tax time too much work.  (One still has a 10% annual return.  I'll keep that one.)

Instead of buying high yield common stock, buy mutual funds or preferred stocks.  My Barclays preferred stock has been giving me 8.125% dividends annually for many years.  While there are no guarantees, the preferred stocks often have some minimum surrender value.

Ruger:RGR and American Outdoor Products: AOBC, owner of Smith & Wesson have been beat up by impending gun control, more than makes any rational sense; both firms have significant product lines in no danger.  Buying because you respect what a company does is never wise; take out a billboard instead; it's cheaper.

A number of these dogs will be taken behind the barn and shot, what is left will be reinvested in mutual funds.  FOCPX has had a 35.74% annual growth; LGILX: 35.76%; CPOAX: 44.6%; LCEIX, which I bought $10,000 of about 20 years ago, is now a bit more than $49,000.  The last year was only 3.06% growth.  When you shoot dogs, the capital loss wipes out an equivalent amount of capital gains.  This is why this is usually done late in the year; get the full benefit in reducing taxes owed on your capital gains.  But you only get to take a $3000 net capital loss per year to reduce your income for tax purposes.  Capital losses beyond $3000 can be carried over to following years.

The other reason to keep track regularly is that my GE bonds matured, and I had a pretty impressive amount of money in a cash account for most of a month, instead of re-invested in one those mutual funds.

Curiously, even though the DJIA is down more than 300 points, several of the dogs are worth more now than they were three hours ago.  Not dramatically better, but I have suspected for some time than my Schwab portfolio was  at least in part contrarian.


Jim Dunmyer said...

The Toledo Blade newspaper carries a column by Chuck Jaffee, a market analyst. A few weeks ago, his column touted Index Funds, based on the DJIA or some other broad index. He said that Warren Buffet and a friend of Warren's invested X dollars, Warren using an index fund that had little or no management fees against his friend's [managed funds or individual stocks, I forget the details]. The upshot was that the Index Funds portfolio yielded 6-8% as opposed to not nearly as good as the other guy's investments.

You pretty much have to be invested in equities (stocks) to make any money in the market, but a bit of careful research is always called for. About 20-25 years ago, my wife performed some research and got us into several stocks that have done well, some paying dividends, along with some mutual funds. We've done OK, but I'm not sure if we'd have been just as well off with Index funds.

FWIW: we bought some Ruger back in about 2001, and some Smith & Wesson in 2013. We're way ahead with the former, don't know about the latter. I also drank the Tesla KoolAide and bought 200 shares in 2013 for right at $200.00. About 3 years later, I figured it was about time for the whole thing to collapse, so got out at a bit over $300.00. It's $315 right now, has been as high as $350+; I still think it's likely to fold.

One needs to stay far away from such risky investments; I bought in because I had the money to spare and wanted to roll the dice. Even losing it all wasn't going to force me to return to the work force. Conversely, investing in only bonds or precious metals will usually not give you near the yield you need for retirement. No, you probably won't lose it all, but you might as well bury it as far as growth is concerned.

StormCchaser said...

Plenty of research shows that ETF's beat mutual funds. Mutual funds run on the basis that the managers can pick stocks better than random selection will do.

They play games to make it look that way. For example, they'll start up a bunch of mutual funds, all run by the same manager. The ones that don't do well get quietly closed down. If you then look at the manager's stats, he looks like a genius.

Of course, a lot of the managers believe they are geniuses. Research says otherwise. That premium you pay to the manager doesn't buy anything.

ETF's run with dramatically lower premiums - especially simple ones like index funds.

A good strategy is to buy a number of ETF's that are in different categories - to achieve classic portfolio diversification, but at the category rather than individual stock level. And, of course, to diversify between high yield/risk (basic economics ties those two together), lower yield, lower risk, international, domestic, etc. And, have a reasonable amount in bond ETF's.