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2012 First Qtr Portfolio Performance

April 3rd, 2012 No comments

The markets have done well for the first quarter of 2012.¬† We have new milestones for all three of the major indexes. I’d say the NASDAQ breaching 3,000 is the most significant because we haven’t seen that number for over 10 years!

S&P500 1,402.21 (+12.0% YTD)

DOW 13,102 (+8.1% YTD)

NASDAQ 3,044 (+18.7% YTD)

The DOW is underperforming relatively because its big hitters, MCD, IBM and CVX have underperformed (remember that the DOW is a price weighted index not market cap weighted!). Apple single handily has really improved the returns of both the S&P500 and NASDAQ. Apple is now 12% of the entire NASDAQ and 17% of the NASDAQ 100. Apple is the reason why the NASDAQ breached 3,000, with an over 50% gain in the shares so far this year.

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5 Ways to Increase Your Investment Income

February 16th, 2012 2 comments

When I started investing for income, my primary goal was to find good companies to invest in. An investment that pays you income is easier to value and much more likely to be an investment that is shareholder friendly. Also, a track record of paying dividends implies that the company manages its finances well.

After investing for a period of time, I have realized that your investment income can be a very powerful tool to increase your spending or supercharge your reinvestment into other companies that are attractively valued. By continuously putting money to work in the market can enable you to get outsized returns by taking advantage of opportunities that develop. Or, you can also just spend the money without selling any shares!

The more investment income you create, the better off your portfolio will be. Here are some tips to increase your investment income.

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Investing For 2012: All You Need Is A Few Good Ideas

January 21st, 2012 7 comments

For the new year, we will be bombarded with new investment ideas, portfolio returns from everyone, and the constant drumbeat of analysis/FUD/predictions from the major media financial programs. It’s a good time to take a step back and turn all this stuff off. Keep your focus on what your are trying to accomplish with your portfolio.

The biggest threat to your portfolio is giving in to the temptation that you need to do “X” (whatever it is this week) because its the newest “trend”, will get your awesome returns, and the story is “developing”. There are so many things you could invest in, some of them will be great ideas while many won’t be great ideas. Or if it is a good idea, you need to confirm that you (and not someone else) can actually make money with it.

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How To File Your MLP K-1 On Your Taxes

January 14th, 2012 4 comments

A new year brings a new tax return! To get a head start on this I’m going to talk about the filing of K-1 forms. If you don’t invest in MLPs, this will also give you an idea of how these are accounted for on your tax return.

One of the main reasons why many people don’t invest in Master Limited Partnerships (MLP) is due to the complexity of filing taxes. It is more complicated than simple corporate common stock because when you own ‘units’ in an MLP you actually are a partner in the company. As a partner, you need to account for each component of the business in your personal taxes including gains/losses, dividends/interest and company deductions.

While it is more complicated, it is not overly burdensome. In this article I will show you what your getting yourself in when you file your K-1 on your income taxes using documentation from a 2010 tax filing. This is meant as a overview of the process, not necessarily an exact how to guide for every type of filing and investment.

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How To Make Money Off Of Low Interest Rates

September 25th, 2011 No comments

About 5 or 6 years ago, it was possible to make 5% on money market accounts that you can get at your bank or credit union. When you can earn 5% with such little effort, you can make a case to keep cash on hand since that’s not a bad return in the context of long term bond and stock returns (relative to the effort required to get a better return).

But, of course, there is a reason why cash is not a good investment. It isn’t a real asset because how it makes money is in large part determined by short term interest rates which are manipulated by the Federal Reserve. And as we have seen recently, the Federal Reserve has used its authority over interest rate policy to push rates effectively to ZERO.

However, there is a silver lining. Lower interest rates makes borrowing cheaper for things like car loans and mortgages.  Yes, it is and I cover here two indirect and one direct way to make money on low interest rates.

How The Professional May Do It

Banks and professional investors make money on interest rates effectively by borrowing at lower short term interest rates and lending out at long term interest rates or buying assets with higher longer term returns on investment. An example of this strategy is home mortgages. This works most of the time because investors/consumers generally want higher rates to borrow and lend at longer terms. They can also juice their returns by using leverage to increase the total return (leverage is borrowing additional money against the value of the investment). This kind of financial strategy can make lots of money, particularly now that rates are so low.

How would an individual do the same thing? A simple strategy would be to borrow at a low rate and buy assets that have a predictable rate of return. This would give you an effective spread that you can claim as your profit. But, buying Apple (AAPL) wouldn’t be a good candidate because the rate of return is unpredictable (no doubt you could have made a boat load of money nonetheless). Think of investments like bond, preferred stock and dividend stocks.

On to the specific strategies.

Buy A Leveraged Fund/ETF

Professional investors can borrow on your behalf to make you more money. They do this by leveraging part of your funds to buy longer dated, higher yielding assets. A good example of this is municipal bond funds. Typically, municipal bond funds leverage about 30-40% of their assets to buy more bonds. The spread created increases the income available to shareholders.

An attractive type of fund for this strategy is municipal bond funds. Since muni’s are tax exempt, you generally can’t deduct your interest that you pay on your borrowing against the income earned on the muni’s. However, when the fund does it, you get a juiced return which is still all tax exempt.

Example:

NNJ Muni Bond Fund (leveraged): 8.2% yield

NJV Muni Bond Fund (un-leveraged): 5.7% yield.

The difference between these funds demonstrates the extra return available when using leverage.

Buy Mortgage Reits

Another opportunity to make money off of low interest rates manifests itself in Mortgage REITs. These companies borrow at very low rates, leverage their borrowing, and buy mortgage backed securities. These investments are earning dividends of 10% per year, some even more. This type of investment is not as risky as it sounds, because if you stick to the highest quality companies, you can still make money when rates eventually go up. A good example of such a company is Annaly Capital (NLY), which was still making money when short term rates were high 6 years ago (just not as much money).

Just keep in mind that rates will eventually go up, so these high dividends won’t last forever, but it is a good bet that they will still make money compared to other investments.

Interactive Brokers Investor Account

But, as an individual, you don’t have the ability to borrow at same low rates as banks or professionals, right? In most cases this is true. Today, if you borrow money at your brokerage, they will charge you perhaps 7-10% (this does vary according to the broker and account privileges – you might be able to do better). Even if you get a better rate, you normally can’t leverage more than 50% of your portfolio value (this is less than even a home mortgage, where 4-1 leverage is normal).

This is where Interactive Brokers comes in. They will lend you money at little more than the Federal Reserve rates (which are currently about 0.25%) Р1.8% for Portfolio Margin. They offer two type of margin accounts (accounts that allow you to borrow money against your investments), Regular Margin and Portfolio Margin. The first account is what a typical broker provides which is 50% margin against your investments. The Portfolio Margin account allows up to 6X margin at that low interest rate (the actual margin amount is subject to their rating Рit depends on each individual  investment you make how much you can actually borrow).

Example:

Buy high quality preferred stocks such as Realty Income Prfd-D (7.375%) (O-D) on margin.

One warning though, Interactive Brokers is a serious broker and isn’t as friendly to work with because it a “Pro” site. You need to learn how to use their site and especially understand how the margin works and particularly how a margin call would work. This is not a good broker for the uninitiated. I expect to write in the future about my experience with this broker.

Final Word About Taxes

One last thing to keep in mind is concerning taxes. In general you can deduct you investment interest against your dividend or interest income, if the investment is fully taxable. So, non-taxable investments or even investments that qualify for the lower tax rates don’t pass this test. This is something to keep in mind when you are trying to calculate your ‘after-tax’ spread.

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