Risk/Reward Vol. 334
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Given tomorrow's schedule, I decided to publish one day early.
As noted each week, this publication does not render tax advice. That said, on Tuesday I was reminded, via a telephone conversation with the most successful fixed income investor I know, that tax considerations can and should come into play when purchasing fixed income securities. I purchase most of these in our tax deferred retirement accounts of which Barb and I have several. Since these accounts are tax deferred, I pay little attention to how the distributions from each are characterized. However, were one to own these in a taxable account, one may wish to prioritize the purchase of those securities paying "qualified dividends" (such as bank preferreds) since generally they are taxed at a lesser rate than ordinary income. The distributions from non-qualified securities (such as the preferred stocks of real estate investment trusts, closed end preferred stock funds and any exchange traded debt) are taxed at one's marginal rate. A quick way to ascertain if a distribution is qualified is to read the precis of its prospectus found at www.quantumonline.com
Speaking of taxable accounts Barb and I have five. Two are for cash and legacy holdings. Two are in the hands of two investment advisors. And I manage one. The one I manage is reserved for cash, for tax advantaged securities (municipal bond funds, primarily) and for those investments that are unsuited for retirement accounts (e.g. master limited partnerships). This last category can be a sticky wicket. That is why I recommend retaining a knowledgeable tax consultant/preparer to anyone wishing to play the game as I do.
As foretold in the last edition, I entered the market in force this week. I deployed a third of the funds that I manage. I concentrated on preferred stocks and exchange traded debt. Each averages annual distributions in excess of 6%, and all were purchased below par. In addition, I bought leveraged closed end funds yielding above 8% but trading below net asset value. I also bought oil company stocks. I was asked whether I foresaw holding any of these for a prolonged period. My response was consistent with my philosophy: to wit, I seek a 6% annual return with the least amount of risk. If I achieve that return via capital appreciation in a matter of a few weeks or months (as I did last year), I will sell. Or if I perceive a marked downturn in the value of what I bought, I will sell. Frankly, for the reasons stated last week (in particular the forces that should moderate further upward movement in the yield on 10Year US Treasury Bond) I see a period of stability in the securities I now own. If that is the case, I will hold them indefinitely and harvest my 6% return via distributions (and not capital appreciation).
The most speculative purchases I made this week were some closed end municipal bond funds. I say speculative, not because of any underlying credit risk, but due to the uncertainty surrounding President-elect Trump' s plans for income taxes. Any significant decrease in the individual marginal rate traditionally decreases the value of muni's. That said, they just seem oversold. Getting a 6% tax preferred return on a portfolio of bonds trading well below their net asset value was too good to resist. Helping me make the decision was a well reasoned article from Columbia Threadneedle which I follow on Twitter. For those of you who do not tweet, I highly recommend opening an account and following your favorite investment gurus (in addition to PEOTUS). In addition to Twitter, I derive a great deal of investment news across a variety of social media outlets such as my CNBC and Seeking Alpha apps.
For those who observe, Merry Christmas and/or Happy Hanukkah. To all others, enjoy your holiday
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