attack my high-yield investing

[Alex in Virginia]

Over the years, I have asked 6 so-called financial advisors to poke holes in my high-yield investment approach. No poked holes, but every one has rolled his/her eyes and told me I don't really want to do what I do. What do you say?

I'm going to take the socratic approach on this thread. I'll just give you the bottom line and not bore you up front with the specifics of what and how I do what I do. Then, based on your questions or comments, I will fill in the blanks.

For almost 4 years, I have invested my IRA funds only in high-yield dividend stocks. When I started, I set a minimum of 6% yield, but in practice I have been operating on a minimum 8 - 8.5% yield for the last 3+ years. Over the last 6 months, I have begun shifting some money into bonds, but again only high yield (10% or better).

This means, of course, that starting next year (at 66), I anticipate a withdrawal rate of 8% per year from my IRA -- without touching the principal (which has doubled since March of 2009).

In all my readings, I have never heard of anyone advocating this route. I want to see if I can defend it effectively. So please take your potshot.

Thanks.

 

[REWahoo]

Defend how you can stop a pendulum from swinging because that's what you're up against. What's great today won't be that way over the long run.

EDIT: Looking at your spending thread, I'd suggest you immediately cease and desist on any and all efforts to increase spending. Your investment strategy will likely result in you needing every penny you can get your hands on.

 

[GrayHare]

That high a yield in the current environment implies high risk. If you are OK with that risk level, IMO fine, but I generally treat my IRA more conservatively than that.

 

[samclem]

Alex, I wish you were public so I could short you. It would be a good hedge to my portfolio: When the big crash comes and all my other investments are in the toilet, I'd have a big payday. But, there would be counterparty risk . . .

 

[Animorph]

Your principal is very at risk, especially with high-yield stocks and bonds as opposed to something more tame. Those kinds of yields I associate with nearly out of business companies. Hopefully the high yield makes up for the risk, but I wouldn't use it all as income.

You are not very diversified, meaning you can expect wider portfolio value swings than necessary. With so many similar investments you are more vulnerable to a single event/trend knocking your entire portfolio down.

How stable is the income? How did it do through 2008/2009?

 

[hlfo718]

Are you saying 100% of your net worth in this high yield strategy and in individual stocks/bonds? What if you suffer a 10% or more set back? Will that change your life style substantially? Keep in mind if you have a company that goes bankrupt in your portfolio, that is a permanent loss. So your portfolio won't be spitting out 8% once that happens.

 

[brewer12345]

I've been a credit analyst most of my career and done high yield bond investing both rofessionally and for my own account. It is painfully obvious that there are excellent times to be in the junk market and excellent times not to be in it. Here is a nice write up on such: Life, Investments & Everything: Dumpster Diving In The Junk Bond Market – Part 1

As you can see here BofA Merrill Lynch US High Yield Master II Option-Adjusted Spread (BAMLH0A0HYM2) - FRED - St. Louis Fed junk spreads have fallen below 5% which puts us in "stay away" territory. Since I am a bottom fishing value investor, I still do daily searches of the junkiest junk Schwab will let me see (rated B3/B- or better) and there are very, very few issues coming up in 10% yield territory (and all but one I would not touch with your 10 foot stick). The junk market is not attractive and I will either allow my existing junk positions to get called (most is callable later this year) or I will sell it at a price I like. The new issue bonds in the junk market are coming out with extremely weak covenants, higher leverage levels, and more aggressive/exotic structures (pay-in-kind bonds, sponsor dividend deals, etc.). Caveat Emptor.

 

[Alan]

For almost 4 years, I have invested my IRA funds only in high-yield dividend stocks.

How stable is the income? How did it do through 2008/2009?

From his OP, I don't believe it went through 2008/2009.

 

[veremchuka]

If it works for you...

But you didn't say what your AA is. If you have all equities in high dividend yielding stocks I think you are taking a lot of risk especially for a 66 year old. Companies that pay very high dividends (6%, 8%!) do so for a reason and I don't want to take on that risk. I hold a minor position in the Vanguard HYCB fund but high yield anything is risky. Without a proper AA you may be very unhappy one day.

It's your money...

 

[truenorth418]

I have been in the Vanguard high yield fund VWEAX and it has been very good to me. I figured that the diversification and Vanguard approach provided enough safety. That said, I have begun exiting the position and taking capital gains with me. The last decade has made me wary of bubbles and high yield feels like one to me, especially if the economy slows.

 

[Texas Proud]

Alex,

Nobody will be able to poke a hole in your thinking except the market... because it is what you think...


There is a lot of study out there about the optimum portfolio that shows that what you are doing is not 'the best'....

Will it work for you Only time will tell... you might have a short enough time frame that it will work.... however, I would hate for you to find out that it does not work when you are in your mid 70s....



Edit to add.... your portfolio would not be growing if you are taking all the income out... so any defaults are to principal... and your buying power will be dropping over time due to inflation... if that is OK with you... you have a great plan....

 

[vxp036000]

Ignore the naysayers. they make it easier for those of us that know what we're doing I also use a high yield approach to investing. My friends with their so-called safe investments get a whopping couple percent return each year. I average about 10% / year. 2008, they ask? Yes, I was up 12 percent after the crash from shorting a few stocks So I can pay for my living expenses year after year with slightly less than a 500k account.

Over the years, I have asked 6 so-called financial advisors to poke holes in my high-yield investment approach. No poked holes, but every one has rolled his/her eyes and told me I don't really want to do what I do. What do you say?

I'm going to take the socratic approach on this thread. I'll just give you the bottom line and not bore you up front with the specifics of what and how I do what I do. Then, based on your questions or comments, I will fill in the blanks.

For almost 4 years, I have invested my IRA funds only in high-yield dividend stocks. When I started, I set a minimum of 6% yield, but in practice I have been operating on a minimum 8 - 8.5% yield for the last 3+ years. Over the last 6 months, I have begun shifting some money into bonds, but again only high yield (10% or better).

This means, of course, that starting next year (at 66), I anticipate a withdrawal rate of 8% per year from my IRA -- without touching the principal (which has doubled since March of 2009).

In all my readings, I have never heard of anyone advocating this route. I want to see if I can defend it effectively. So please take your potshot.

Thanks.

 

[brewer12345]

Ignore the naysayers. they make it easier for those of us that know what we're doing I also use a high yield approach to investing. My friends with their so-called safe investments get a whopping couple percent return each year. I average about 10% / year. 2008, they ask? Yes, I was up 12 percent after the crash from shorting a few stocks So I can pay for my living expenses year after year with slightly less than a 500k account.

Wow, its amazing that people's genitalia has grown so big, so fast after the most recent mass circumcision.

 

[vxp036000]

Well that didn't take long. Let's see what else you guys can come up with

 

[REWahoo]

Well that didn't take long. Let's see what else you guys can come up with

Meh. We don't have to come up with anything. Seems you're the one with something to prove...

 

[brewer12345]

Well that didn't take long. Let's see what else you guys can come up with

It is your money: do as you see fit. And much luck to you.

 

[braumeister]

Have you considered the tradeoff between your approach and a guaranteed 5% per month return on a well designed forex system?

 

[donheff]

What do we have here, a pair of trolls? One with 17 posts joined by his or her significant other with 3 posts? I'm calling b***s**t on this thread.

 

[vxp036000]

My return is far from guaranteed. I certainly have been through a few draw downs. I'll take a paper loss and wait for a rebound. My personal experience has been that active investment far outperforms passive. Active investing is not for everyone. It requires adhering to a strict set of rules and never deviating. And when the market changes, you will adapt or end up broke.

I see some folks employing a buy and hold strategy, looking for bargains in the form of companies that are almost broke. Hmm, I wonder that approach doesn't work...

I think the comment about forex was tongue in cheek. A "robot" will not profit in the long run, for the simple reason that the market changes. I'm skeptical that a so-called forex robot will even profit short term.

 

[vxp036000]

Another winner

What do we have here, a pair of trolls? One with 17 posts joined by his or her significant other with 3 posts? I'm calling b***s**t on this thread.

 

[Alex in Virginia]

response #1 to comments on my high-yield investing

Defend how you can stop a pendulum from swinging because that's what you're up against. What's great today won't be that way over the long run.

Okay... we're off and running.

I'll answer the questions and/or respond to the comments one at a time, so things don't get all tangled up.

I'll assume the pendulum refers to the market swinging up and down day-to-day, as well as swinging back and forth from bull to bear. This point comes to mind on that:

My income and my 8-8.5% annual IRA withdrawal expectations are based on the dividends and interest generated from this point forward by my portfolio, and do not require cashing out any of the portfolio's holdings. So, it is irrelevant to my projected income stream what the price of any stock in the portfolio -- or the market value of the portfolio as a whole -- may be at any given time. I don't have to sell anything, and I particularly don't have to sell anything when the market pendulum is on a downstroke.

So much for the market's up-and-down pendulum?

Note: Hopefully, this also answers Animorph regarding having my principal at risk, and HLF718 regarding what happens if my portfolio "suffers" a 10% set back (presumably to the portfolio's market value.)


Alex in Virginia

 

[vxp036000]

I'll take a swag at the pendulum. It's only a pendulum when viewed on a particular timescale. What looks like a downturn to a long term investor is completely irrelevant to a short term investor and vice versa. So one may adjust their investment horizon according to the pendulum. Now, you are free to use the pendulum to your advantage.

 

[REWahoo]

Wow. How could I have been so wrong?

You guys have obviously figured out how to make big bucks in the market. Enjoy!

 

[vxp036000]

Closer to a few pennies than big bucks, but it's better than working.

 

[brewer12345]

Wow. How could I have been so wrong?

You guys have obviously figured out how to make big bucks in the market. Enjoy!

Silly successful early retiree: tricks are for kids! (and hookers)