Kris’ note: One of the hardest decisions an investor can make is when you know the market is overvalued… but you also believe it could become even more overvalued. In other words, that stocks will keep going up, even though the fundamentals may not support it.
So what do you do? Do you sell your stocks… hold cash… and then hope you were right about the overvalued market… Or do you look for other options? A way that can give you a relatively high degree of safety, while also giving you exposure to the market if prices continue to go up.
As we’ve said, it’s a hard decision. But in today’s Dispatch, colleague Andrey Dashkov shares a simple strategy that allows you to do just that. You may prefer to stay in stocks and try to time the market before the next crash. But if you’d rather not risk it, read on for a clever way to play a rising market without going “all in”…
By Andrey Dashkov, analyst, Casey Research
Here we go again… an investment that calls itself safe… but actually isn’t.
We’ve been here before. In 2008, mortgage-backed securities that eventually sent the global financial system into a tailspin had the highest safety ratings.
They were deemed as safe as fixed income could be.
Until the façade went down.
Thirteen years later, we’re looking at a similar situation.
I’m not saying it’ll trigger a Great Recession 2.0…
But I want to let you know how you can protect yourself and your holdings. And of course, how to make money.
I’ll echo Kris Sayce, our editor, who has been talking about asset allocation recently:
It’s something that most investors likely don’t consider.
Rather than looking at their total return across all assets, they may just look at the return of their stock portfolio… and assume they’re doing just fine.
That’s a big mistake.
That’s why we’re devoting this week to asset allocation 101. It’s crucial if you want to build a portfolio that works for you as a whole… not just part of it.
In a second, I’ll talk to you about one part of your investment portfolio that looks like it’s doing fine… but which can blow up at any time.
If this is your first time reading the Dispatch, welcome. If you’ve been here before, welcome back.
At the Dispatch we have two goals:
To introduce you to the most important investing themes of the day, and
To show you how to profit from them.
We do this by showcasing ideas from our in-house investing experts: Nick Giambruno and Dave Forest. And from the founder of our business, Doug Casey.
Nothing Fixed About This Fixed Income Fund
A research paper is making waves in the financial community. It’s titled: “Don’t Take Their Word for It.”
The paper makes a bombshell claim: “about one-third of bond funds are much riskier than their rating suggests.”
So if you go to a rating provider like Morningstar, enter the symbol of a bond fund you hold, and see five stars… you probably should take that with a grain of salt.
The reason why bond fund managers try to game the rating system is very simple…
Low interest rates. They are your income killers.
They are the reason why bonds and stocks don’t pay much in income.
…Which investors still want. And where there’s an unmet need, there’s money to be made.
This is why one-third of the bonds mutual fund investors hold are riskier than they seem. If you crank up the risk, the yield also goes up.
How to Protect Your Capital and Increase Income With Little Extra Risk
So it would be a good idea for you to review your bond holdings. They may not be as bulletproof as advertised.
You can also take a look at this bond ETF: iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD). It holds investment-grade bonds and has a transparent portfolio structure. It also pays about 2% interest.
There are other ways to protect your portfolio and increase the odds that it delivers the performance you need.
Say you have $10,000 in your “bond” portfolio. The number one thing you expect from it is limited risk.
So here’s an idea. Instead of parking all of that in a bond fund, how about a split like this:
90% in the least volatile bonds possible;
10% in publicly traded warrants.
For a $10,000 bond portfolio, you put $9,000 in an ETF like iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) mentioned above.
As of writing, this ETF is up 3% over the past three months, and it pays 2% interest.
And as for the remaining $1,000… You could try splitting it into two or three parts and buying warrants with this capital.
Your risk will be limited because you only put $1,000 at risk. But if some of the warrant bets work out, you’ll complement the coupon that 90% of your bond portfolio generates.
In other words, if you want to look for extra upside without putting too much capital at risk, consider warrants. These are publicly traded securities that you can buy and sell as easily as shares.
Dave Forest has recently told our readers about his track record with these investments:
One warrant I recommended to readers of my Strategic Trader advisory – using the strategy I’m talking about – returned 4,942%.
Here’s the critical point: with that 4,942% return, if you’d invested just $850, you would have walked away with over $42,000. That’s enough to pay most of the yearly living expenses for an average retiree.
Another warrant returned 2,805% for my subscribers. On an $850 investment, that would have yielded a very significant return of over $23,800.
Yet another position I recently closed out yielded a 393% return – turning an $850 initial investment into $3,340. That’s enough to make rent, pay utilities for several months, or take a nice vacation.
Sounds like a great way to improve your returns without taking on too much risk.
Analyst, Casey Research