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Published: August 25, 2009
I'm going to share some advice I think
you'll find valuable.
You see, after one of the most brutal bear markets in recent
history... a bear market where stocks fell, bonds fell, oil
fell, housing fell, Bear Stearns collapsed and Lehman Brothers
went under... every single one of the 21 holdings in my
High-Yield Investing portfolios is showing a positive return.
Some have gains as high as +50.3%.
I want to share with you how I did it.
Just to clear something up right away, I'm not smarter than the
market. But I do have some techniques I've used to guide my
portfolios through this bear market, and I know they can work
for you as well:
Tip #1: I'm Not Afraid to Take a Loss
Like everyone, I find it tough to admit I'm wrong on a pick. But
I find it even tougher to continue watching while a holding
falls in value.
That's why I'm not afraid to take a loss. In the bear market I
closed out several positions that locked-in losses, and I'm sure
glad I did. If I held on to every stock I had at the start of
the market's fall, I wouldn't be showing near the returns I'm
enjoying now.
For example, in September 2008 I sold shares of the Morgan
Stanley Eastern Europe Fund (NYSE: RNE) even though it assured a
loss of roughly -15%. But I'm happy I did. The fund went on to
fall from about $20 per share when I sold, all the way to a low
of $5.81 in March 2009.
It's almost cliche by now, but knowing when to sell a stock is
just as important as knowing when to buy. You can't be scared to
admit you were wrong and move on to another opportunity.
Tip #2: I Limit Exposure to Common Stocks
Common stocks in general just don't yield much. The S&P 500 has
a yield of only 2.6%. But if you think that's a negative for
income investors, think again. Because common stocks yield so
little is a key reason my portfolios are showing green.
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When I can't find the income I desire from common stocks, I
look elsewhere. These "other" places are exchange-traded bonds,
preferred stocks, master limited partnerships, and income
deposit securities. The advantage is that in addition to higher
yields, these lesser-known securities are also less volatile
than common stocks and hold up better in down markets -- even
outperforming the broader averages in bull markets.
For example, as you can see from my chart, the Alerian MLP Index
-- an index of master limited partnerships -- is up over +30%
year-to-date, more than doubling the performance of the S&P 500.
Tip #3: I Buy When Yields are High
I didn't know when the market was going to bottom, so how come I
bought 12 of my current holdings in the months of February,
March and April (the S&P 500 hit its low on March 6th)?
It wasn't that I had inside information. I simply couldn't help
but add to my portfolio at the time -- with everything going
down, the yields available were through the roof and well above
historical norms.
For instance, I picked up the
exchange-traded bonds of one company
in early February after they dropped
much too far for an investment-grade
security. At the time, they were
yielding 10.7%. Today that yield has
come down to 8.4% since the bond
price has rebounded +26.7%.
Incidentally, I also alerted my
readers I was so convinced this bond
was undervalued that I was adding it
to my personal portfolio. I've since
profited handsomely alongside my
subscribers.
When I added picks like this, I
didn't know if we were at bottom or
not -- I simply knew the payments
were safe and too high to ignore.
This is the same strategy my
colleague Nathan Slaughter employed
for his portfolios in his ETF
Authority newsletter, and he's
enjoyed similar results.
Even in a Bull Market These
Strategies Work
Just because the bulk of the bear
market appears to be over doesn't
mean I'm changing my investing
methods. The truth is that while
these techniques have been great in
a bear market, they apply to any
time.
So if we're at the start of the next
great bull market, I'm ready for my
portfolio to continue higher. But if
we have another leg down, I know I
can come out the other side in good
shape. I've already got the record
to prove it.
Good Investing!
-- Carla Pasternak
Editor
High-Yield Investing
P.S. -- If you'd like to join my
High-Yield Investing
team and see my current holdings, I
invite you to try a risk-free
subscription. In this month's issue,
I take a peek at a mouth-watering
opportunity awaiting bond
investors... which includes yields
of up to 11.9%.
And as always, remember that we
offer a money-back guarantee if you
aren't completely satisfied with
High-Yield Investing. |
