I've always been a fan of what are now called "alternative investments" and never really cared as much for "generic index style equities", although I have owned them of course. Property, commodities, gold and higher yield instruments were always more interesting to me once I began to understand how imbedded inflation really was in the modern world.
Now that I am retired and living on my money, my "business" is to generate income as a goal more important than capital gains. Increasingly I am working on the great divide between tax-deferred and taxable accounts in the US, now and for the future. Perhaps we should call them "totally taxable" and "partly taxable" accounts since every penny one takes out of the IRA or 401K is taxable while only gains and dividends and interest are taxable from the taxable accounts. To take gold as an example, I'll want to own gold and gold stocks (CEF, GDX, RGLD,SLW) in the taxable accounts and own the high yield Gabelli buy/write (GGN) gold stock fund in the tax-deferred accounts. For oil I'll want aggressive growth petroleum stocks for the taxable accounts and the high yield oil and gas and pipeline funds in the totally taxable tax deferred accounts.
In yield vehicles this dichotomy is also important. In the taxable accounts it's important to limit taxes on interest, and I have used Vanguard municipal bond funds for this. Fearing rising rates in munis for several reasons, I have long since moved almost completely to the very short term end with VWSUX which is only about one year in average duration. It is only paying about 2.3% right now, but that makes it nearly 3.4% compared to taxable short term vehicles. Have you noticed what TBills are paying now?
In the tax-deferred accounts I have also been looking at and owning "buy/write" funds beyond GGN. Many of these are closed-end stocks although there are a few open-end mutual funds (HSGFX) which do the same things. All of these along with everything else got smashed last winter and in March this year due to margin calls and dumping by hedge funds who had leveraged these funds up greatly with borrowed money. I started moving into these funds very slowly before and after the lows in bits and pieces. Many were yielding over 20% annualized on November to March market values and were selling far under net asset values.
The "buy/write" approach has been used for generations by wealthy people to increase the yield of their stock portfolios. You own a portfolio of blue chip stocks and then consistently write covered call options above current prices. You collect the dividends and the premiums for the sold options. You are limiting your potential gains if the stock rises, but your income stream is good. It's better when market volatility is high, but that usually means that stocks are going down, so you can lose that way. Since last fall and this spring, volatility and fear have been high so that the option premiums have been good. Many of these closed end funds have had amazing gains but are still far below their prices in 2006-2007.
If prices go up normally volatility declines and the option premiums drop, but these funds can keep re-buying and re-writing and ringing up capital gains. In a totally taxable (deferred account) you are less interested in gains than in income. You can tolerate capital losses if income stays high, and it does.
I have always liked HSGFX as a classic unleveraged buy/write fund. Hussman's goal is to pick good stocks which theoretically all go up and sell options or futures on the SPX and NASDAQ which represent the typical or average stock. This worked brilliantly from 2000 to 2003 since quality stocks were oversold and junk stocks overbought. He's had an uneven record since 2004 since junk and quality have been treated nearly the same by the market.
Eaton Vance has a number of very interesting "alternative" closed end funds using either leveraged or buy/write strategies of various types. I made very good gains in both ETG and ETO in the past few months but have closed them out as they seemed quite vulnerable to a stock decline if we have one. ETFConnect is a another good place to look at some of the basics of their funds. Also look at them on a good chart site both with dividends included and without. BigCharts (without dividends) and Morningstar (Snapshot Performance Charts with dividends) are good places to look at them.
One of my current favorites is Eaton Vance Risk-Managed Diversified Equity Income Fund, ETJ. This fund writes puts but also buys puts to gain both income and price protection. Read their literature at the site to see how they do this. They are paying over 10%, but did much better pricewise during the crash and after than any of its competitors.
Right now, in addition to GGN for gold stocks and GIM which is a foreign sovereign bond fund from Franklin Templeton which has been around for decades, I have ETJ. Add that to the oil and gas royalty trusts and a pipeline trust (TYG) and TIPs fund (VAIPX) plus a much smaller portion of PCRIX, and a larger portion of LSBDX. Except for HSTRX, which I plan to move to the taxable fund, all of these pay decent dividends. If you are retired and have money in a totally taxable but tax-deferred account, be sure it pays interest or dividends which would be totally taxable anyway.
In the taxable accounts, two-thirds is in VWSUX and the rest in the gold stocks mentioned above plus the Trader Vic Rydex Managed Futures Fund (RYMFX).
In both types of accounts I am currently still making bets of inflation/currency debasement with a reasonable part of the totals but with a heavy income emphasis. I have reduced the total number of holdings so that I can move quickly to sell or switch if conditions change.
In both types of accounts I am currently still making bets of inflation/currency debasement with a reasonable part of the totals but with a heavy income emphasis. I have reduced the total number of holdings so that I can move quickly to sell or switch if conditions change.
How I wish that it were possible to develop a "set and forget" portfolio as I tried to do several years ago, but times and markets have changed and so must I. We have to think of our investment portfolios as being our own hedge fund, in the good and original sense of that term. Looking at the chart featuring many of the funds I am describing today. I look fondly at what HSTRX and RYMFX have done through the difficult markets of the past two years. ETJ and HSGFX didn't do too badly either. All four of them are themselves hedge funds in a sense, being alternative and managed funds. (The chart dates from the first week of ETJ in August 2007.)
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