Investors have all kinds of goals for their portfolios, some realistic, some not, which is why we strive to define our goals based upon an investment style that suits our needs and temperment. We have made 7% our goal for the last 3 years and generally have been successful–so why not leave it at 7% for 2017. We know that when we stretch to try to garner gains much above this 7% level we stress out with worry and lay awake nights. We don’t “recommend” that investors ever buy a particular security as everyone has there own needs–so everyone is responsible for there own portfolio. We simply try to lay out “options” through our model portfolios.
As we entered 2016 we knew it would be difficult to reach our goal because of the risk of higher interest rates. Of course now we have the benefit of 20/20 hindsight and we know that there was only 1 rate increase (instead of a predicted 4) and we had sacrificed maybe 1-2% in returns being positioned in short/medium duration securities. Oh well, since we had no great crystal ball we have to be happy with our performance–and we are.
Let’s look at the Blended Income Portfolio 1st. The portfolio, which has a wide range of security types in it, is more heavily weighted in preferred, term preferreds and baby bonds. These items compose 60% of the net asset value, while REITs are near 11%, while common stocks are just about 14% (counting the 2 Canadian issues we hold). The balance is spread among MLPs, CEFs, ETFs and the dreaded “cash” (dreaded since it earns no return). We originally composed this portfolio January 4, 2015 so it is now approaching its 2nd birthday. In 2 years we have a gain of 13.19% which isn’t too bad against our 7% annual goal. Because this portfolio was composed 1/4/2015 we missed a month of dividends and interest as we did not start collecting income until 2/2015. Over this time frame the Standard and Poors 500 is up 8.73% (without dividends) so we are close to equal to the indexes gain. The iShares Aggregate Bond (NYSE:AGG) is down 1.87% (not counting interest of around 2.50% annually). The issue that performed the poorest in the portfolio was MLP NGL Energy (NYSE:NGL). This was a poorly timed purchase for us as we bought shares at around $28/29 per share and it is now trading at $21/share–but since purchase it has traded as low as $7–yes $7. If we truly believed in our purchase we should have purchased a truckload of shares when prices were low–but our MLP learning process is still a work in process. We went through this process back in 2008 and 2009 when we were new to preferred stocks and while we purchased some shares back then at rock bottom prices ($25 issues as low as $5/share) we should have backed up the truck. Like many of our readers we only began buying preferreds and baby bonds in the last 10 years and every year has been a learning process–we figure by the time we are 90 years old we will have learned (and probably forgotten) quite a bit — but the key lesson is that when “there is blood in the streets” there is truly opportunity. Also we have held a small hedge all through the last year and it has cost the portfolio around 1/2% of performance. This hedge is with Proshares Ultra Short Standard and Poors 500 (NYSE:SDS). These ultra short instruments will lose value every month even if the index remains flat as they “roll” futures contracts so they are not good long term holds–we know this but held it just the same. We have now set S&P500 2,250 as the “stop loss” for this hedge and will exit the position if hit.
We will make a few moves in this portfolio in the next week as we tweak for the year ahead.
Looking at the Short/Medium Duration Portfolio we find performance that really exceeded expectations. Recall that this portfolio is composed of only short and medium duration securities. The portfolio contains 4 term preferred issues and 14 baby bonds–and the key item of this portfolio is we DO NOT TRADE in this portfolio. During 2016 we had 2 issues called for redemption and we made 1 purchase. The point of this is to garner a decent return without laying awake nights–all without “trading”. Additionally shorter duration securities have less volatility that perpetual issues. Honestly while there are people that seem to have some success trading, the VAST MAJORITY of people do poorly. The vast majority of people do not have the time, or desire to trade–they only want a return that is respectable. Through 26 months this portfolio has a gain of 14.35%–a return that is very near our 7% annual target. We suggest investors study this portfolio and use it as a guideline for there own portfolio if a low stress 7% meets your needs.
Lastly the Moderate Duration Income Portfolio with Zip is really a variation on the Short/Medium Duration Portfolio. This portfolio primarily contains medium duration securities, but additionally contains 1 or 2 REITs or MLPs which hopefully give the portfolio some “zip”. Obviously when you hold only fixed income securities your upside is limited, but if you can add 1 or 2 issues that are believed to have some upside you can lift the total return by maybe a percent (of course if your “zip” issues fall you reduce portfolio returns). This portfolio had more trades than the short/medium duration portfolio above. The “zip” issue that we used in 2016 was apartment REIT Independence Realty Trust (NYSE:IRT). We held these shares early in the year and sold to book a nice profit during the year and then repurchased when it came back down in price. Obviously using a small portion of the portfolio in this manner creates a little more trading, but if we want a little “zip” we have to trade a bit. This portfolio was created in August, 2015 and through this point in time has a gain of 11.42%. Over the 16 months since inception this return was above our 7% annualized goal by a percent or so. Interestingly the portfolio had a gain of about 10% the 1st year, but had some slippage as the anticipated rate hike took some wind out of the portfolios sail. Just the same a 8% annual return is nothing to sneeze at and we would love to have a 8% return year in and year out.
For 2017 we again carry the portfolios forward as we are long term investors and it makes sense to continue to test strategies year after year.
We will be making some minor tweaks in portfolios in the weeks ahead as we get into the new year and will be letting you know what we are doing and why we are doing it.
Additionally next week we will outline what we believe the economy will be doing in 2017, because without a forecast (whether it be right or wrong) we won’t be able to formulate a plan for the types of securities we want to be holding during the year.