The following post is simply a thought-experiment, and it is not intended as investing/trading advice. “How much new money could be put to work in individual bonds with prices at their current highs?” That’s an interesting question, right? or at least one I find interesting. As I trolled the bond offering-lists this morning, I kept being struck by the thought that, “if I didn’t already have an exposure to this or that issuer, would I initiate new positions?” and I keep having to answer in the affirmative. There are still bonds that could/should be bought. Not a lot, but enough to put a fair chunk of money to work. So, let’s begin there and work backwards. According to a recent paper by Ed Wolff, as of 2010, the bottom 40% of households in this country had a negative, non-home wealth. So, clearly, it is unlikely they have any money to invest in 2013. The middle 20% had a median, non-home wealth of $12,200 in 2010 dollars. Let’s guess that’s grown a bit for them, and they would now have $15,000 they could put to work. The next 20% had a median, non-home wealth (in 2010) dollars of $100,700. Again, let’s assume they made a few bucks in recent markets, and they now have $120,000 to work with. The top 20%, predictably, are well-heeled, with a median non-home wealth of $1.7 million, to which I say, “Good for them”. But also, “their problems don’t interest me”. So, the thought-experiment reduces to this. (1) If a person had only $15,000 to work with, which bonds would be best for her/him to buy now? (2) If the account had $120k, what’s a reasonable way to put that to work in bonds now? Clearly, neither account has money to waste, and, just as clearly, both accounts have to manage their risks responsibly. The smaller grub stake can’t buy in a larger size than singles, or 15 to 20 bonds total (depending on the discounts at which the bonds were bought). The larger grub stake could go fives for everything if they chose to. I don’t think they should. But they could do so for a total count of around 25 issuers, or as many as 100 or so issuers if they did some singles as well. But let’s begin buying for the smaller account, because that’s the more fun project. First, let’s lay out some ground rules. Gains will be taxed at an average rate of 25%, and inflation is running 6%. In other words, a nominal gain of 8% is our ‘break-even’ rate of return. To make less per position is to choose to lose purchasing-power. OTOH, bonds offering 8% or better carry the sort of risks that could swell and cause the issuer to file for Chapter 11 protection, and we’d probably end up making a miserably low (or non-existent) workout. So downside considerations are far more important than possible upside-gains, and the wisest course of action might be that of choosing to lose purchasing-power on some positions in the portfolio, but at steadier and lesser rates than would probably occur if only the highest paying alternatives were pursued. In other words, we’re willing to buy such a way that we might lose 20% of our grub stake, but no more, in an effort to meet or exceed our 8% goal. ‘15’ is an interesting number. It is the sum of 1+2+3+4+5. So let’s ‘tranche’ our cash into five piles, of those sizes, and go shopping, putting small money to work in the riskiest stuff and bigger money to work in the surer bets. In today’s market, you can forget about finding bonds rated AA or better that are worth buying except for a trade. But for this thought-experiment, we’re going to take very seriously the idea that we’re ‘investors' and not make bets on the level/direction of interest-rates. Instead, we’ll be doing the same type of fundamental investing that the stock jocks do, and our intention will be to hold our bonds to maturity. So we’re going to work our way down the credit-rating scale and not accept any more risk than we really have to. For the first scan, I’d suggest you do this. Ask to see all bonds rated A3/A- or better, offering at least 5%. By my count, you’ll be returned roughly 63 bonds of which the most interesting --and surprising-- is Dell. E.g., take a look at this price chart for their 5.65’s of ’18. http://cxa.gtm.idmanagedsolutions.com/finra/BondCenter/BondD... Clearly, something is going on. Whether the price crash has created a buying opportunity could only be answered by doing one’s due-diligence. But it’s something I need to look at. So I’m going to cut this post short. Charlie-------------"The Asset Price Meltdown and the Wealth of the Middle Class" by Ed Wolff
Best Of |
Favorites & Replies |
Start a New Board |
My Fool |
BATS data provided in real-time. NYSE, NASDAQ and NYSEMKT data delayed 15 minutes.
Real-Time prices provided by BATS. Market data provided by Interactive Data.
Company fundamental data provided by Morningstar<