My first of the year rebalancing/repositioning is done. I haven't really made a lot of changes, but have consolidated and/or eliminated some smallish positions to keep it simpler. Bear in mind that my main goal these days is relative safety and fairly steady income with inflation protection for the future. I have both tax-deferred accounts and taxable accounts
In tax-deferred accounts my goal is to generate income within them sufficient to fund IRS "Required Minimum Distributions" (RMD) which are based upon life expectancy. The IRS guarantees (to themselves) that everything in them **will be taxed**. Since taxes are quite likely to rise, I have little desire to increase the total value per se of such funds at this stage. All gains are taxed the same as income, and the IRS is a full partner. So income with some inflation protection is key.
Half of all such funds are now in Vanguard's GNMA fund VFIJX with an average duration of 2.8 years (far shorter than normal but for a good reason), with a very low cost (0.11% per year), and paying 4.80% currently.
Another 12.5% of these funds are in HSTRX which is Hussman's managed Total Return income fund. Hussman has an eye toward inflation-hedged safety and typically has had a fairly high percentage in short duration TIPS. He also keeps 5-20% in gold stocks or gold ETF's or forex and small amounts in dividend paying utilities. HSTRX pays a regular cash dividend of only about 1.5% , about the same as a money market fund, and that's the way to think of it, *except* that it has the flexibility to do a lot more under the right conditions, and it almost always pays a sizeable year end capital gains dividend which I plan to reinvest to preserve the funds's inflation value. (The TIPS ETF's and mutuals I know of are all too long in duration for my purposes compared to HSTRX.)
The remaining 37.5% is largely in the oil and gas trusts that I have discussed so much and in a fund (TYG )containing a lot of pipeline LP's which is structured so as to be suitable for a tax-deferred account. Also included with the trusts is a small position, which could be raised if they get cheaper again, in two bombed-out high dividend closed end funds in real estate and resource stocks, DRP and ETO. The oil and gas trusts and TYG are paying about 9% annually on average. The trusts are of course wasting assets and their estimated reserves lives, ~13 years average at the moment, are very close to their effective stock durations ( see "For the Duration") as measured by the price to dividend ratio. Since the tax deferred funds and their beneficiary are also "wasting assets" ;) this should work out well and keep taxes down in the long run.
The dividend return of this mixture is about 5.3% which is pretty generous at the moment, but except for the trusts the risk is quite low. I plan to continue to trade the trusts once or twice a year on a value basis, selling some when they get too high and buying some when they get too low.
The nice guys at the IRS and in Congress have agreed that we don't have to take out our RMD's from tax-deferred accounts in 2009 since the assumption is that most people had huge losses in them in 2008. I didn't have losses, but I welcome the opportunity to reduce taxes in 2009, the better to fly under Obama radar. Also it allows for some modest compounding by reinvesting the dividends.
The approach this year for taxable accounts is also to minimize taxable income and provide inflation/dollar insurance. All fixed income funds have been shifted into the Vanguard Short Term Tax-free Municipal Fund VWSUX with a duration of 1.1 years, an annual cost of only 0.08%, and paying 3.03% on a distribution yield basis, equivalent to what ~4.15% would be after tax. Approximately 55% of all taxable account funds are now in VWSUX.
Another 11% of funds are in a fund owning my state's longer term AAA municipal bonds and paying 5.8% tax-free which is equivalent to over 8% for a taxable fund.
The rest, ~34%, is in gold and silver, a few metals royalty companies (ROY, SLW, RGLD) I have previously mentioned and the Rydex Managed Futures Fund RYMFX which I refer to as the "Trader Vic Fund" as it operates under Victor Sperandeo's investment principles. The concept here is to hold these hedges "forever" unless they run way up in price. In a sense I hope they don't. I think of them as inflation and dollar debasement insurance for the tax-free income funds. This 34% pays very little or no cash dividend.
The first chart shows the total returns (annualized) of these funds since the inception of HSTRX in 2002:
CEF is used as a proxy for all precious metals in the holdings.
The second chart shows the longer term record since 1988 for the junior funds of VFIJX, and VWSUX and used PRPFX as a proxy for HSTRX as they have largely similar goals. VFIIX/VFIJX and VWSTX/VWSUX have consistent long term records. Even though the whole period was largely a bull market for bonds, these two funds are short enough in duration and high enough in quality that they should perform well as (if) interest rates rise.
Also clearly Central Fund of Canada (CEF), which is a closed end trust holding gold and silver bullion, does very well during inflation and not so well during disinflation while PRPFX and HSTRX are more adaptive to conditions. The same should be true of RYMFX which has only been operating since March 2007 but whose futures trading record under Sperandeo is well documented. CEF is only a part of my metals holdings and I hold it because it is easy to adjust position size with it.
There is very little in the way of "generic" or index equity anywhere. That is both because of the Hussman-inspired portfolio duration idea at my age, and also because with S&P earnings forecasts dropping rapidly, stocks may not be as good values as some of the value people think they are. Plan A is to do very little trading this year, but watch things very closely.
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