Investments

I've come to the conclusion that the Stock Market is an easier medium for investors to understand (i.e., to form behavioral expectations about) than the Fixed Income Market. As unlikely as this sounds, experience proves it, irrefutably. Few investors grow to love volatility as I do, but most expect it in the Market Value of their equity positions. When dealing with Fixed Income Securities however, neither they nor their advisors are comfortable with any downward movement at all. Most won't consider taking profits when prices increase, but will rush in to accept losses when prices fall.

Bank Of America Investment
Theoretically, Fixed Income Securities should be the ultimate Buy and Hold; their primary purpose is income generation, and return of principal is typically a contractual obligation. I like to add some seasoning to this bland diet, through profit taking whenever possible, but losses are almost never an acceptable, or necessary, menu item. Still, Wall Street pumps out products and Investment Experts rationalize strategies that cloud the simple rules governing the behavior of what should be an investor's retirement blankie. I shake my head in disbelief, constantly. The investment gods have spoken: "The market price of Fixed Income Securities shall vary inversely with Interest Rates, both actual and anticipated. and it is good."

However, if you have investment income of $2, 550 or more, you won't qualify for the federal earned income credit. Investment income includes taxable and nontaxable interest and dividends, capital gains, net income from rental of personal property, net royalty income, and net income from passive activities shown on Schedule E, including real estate rentals (see IRS Publication 596, Earned Income Credit, if you are on the borderline and need to know exactly which lines on Schedule E to look at in determining your passive income).

Investment Opportunity
It's OK, it's natural, it just doesn't matter, I say to disbelieving audiences everywhere. You have to understand how these securities react to interest rate expectations and take advantage of it. There's no need to hedge against it, or to cry about it. It's simply the nature of things. This is the first of three successive articles I'll be writing about Fixed Income Investing. If I don't improve your comfort level with this effort, perhaps the next one will strike the proper chord.

If you have investment income of more than $2, 800, you may not claim the EIC. Investment income includes taxable interest, tax exempt interest, dividend income, capital gain net income, certain income from rents or royalties, and certain income from passive activities.

Banc Of America Investment
There are several reasons why investors have invalid expectations about their Fixed Income investments: (1) They don't experience this type of investing until retirement planning time and they view all securities with an eye on Market Value, as they have been programmed to do by Wall Street. (2) The combination of increasing age and inexperience creates an inordinate fear of loss that is prayed upon by commissioned sales persons of all shapes and sizes. (3) They have trouble distinguishing between the income generating purpose of Fixed Income Securities and the fact that they are negotiable instruments with a Market Value that is a function of current, as opposed to contractual, interest rates. (4) They have been brainwashed into believing that the Market Value of their portfolio, and not the income that it generates, is their primary weapon against inflation. [Really, Alice, if you held these securities in a safe deposit box instead of a brokerage account, and just received the income, the perception of loss, the fear, and the rush to make a change would simply disappear. Think about it.]

The typical hedge fund is designed to be a partnership arrangement with the fund manager acting as the general partner responsible for making investment decisions. To join, you must be an "accredited investor" which is defined as a person with a net worth of at least $1 million (or an annual income of at least $200, 000 for the past two years and expectation of continued income in that range). These levels are due to increase.

Banking Investment
Every properly constructed portfolio will contain securities whose primary purpose is to generate income (fixed and/or variable), and every investor must understand some basic and "absolute" characteristics of Interest Rate Sensitive Securities. These securities include Corporate, Government, and Municipal Bonds, Preferred Stocks, many Closed End Funds, Unit Trusts, REITs, Royalty Trusts, Treasury Securities, etc. Most are legally binding contracts between the owner of the securities (you, or an Investment Company that you own a piece of) and an entity that promises to pay a Fixed Rate of Interest for the use of the money. They are primary debts of the issuer, and must be paid before all other obligations. They are negotiable, meaning that they can be bought and sold, at a price that varies with current interest rates. The longer the duration of the obligation, the more price fluctuation cycles will occur during the holding period. Typically, longer obligations also have higher interest rates. Two things are accomplished by buying shorter duration securities: you earn less interest and you pay your broker a commission more frequently.

This is because fixed interest rates are largely linked to market expectations for interest rates going forward.

Investment Solution Strategic
Defaults in interest payments are extremely rare, particularly in Investment Grade Securities, and it is very likely that you will receive a predictable, constant, and gradually increasing flow of Income. (The income will increase gradually only if you manage your asset allocation properly by adding proportionately to your Fixed Income holdings.) So, if everything is going according to plan, all that you ever need to look at is the amount of income that your Fixed Income portfolio is generating. period. Dealing with variable income securities is slightly different, as Market Value will also vary with the nature of the income, and the economics of a particular industry. REITs, Royalty Trusts, Unit Trusts, and even CEFs (Closed End Funds) may have variable income levels and portfolio management requires an understanding of the risks involved. A Municipal Bond CEF, for example will have a much more dependable cash flow and considerably more price stability than an oil and gas Royalty Trust. Thus, diversification in the income-generating portion of the portfolio is even more important than in the growth portion. income pays the bills. Never lose sight of that fact and you will be able to go fishing more frequently in retirement.

These forecasts are mainly based upon growth expectations in European domestic demand of consumption and investment, and at the same time growth of foreign demand in the same fields.

Investment Banking Services
The critical relationship between the two classes of securities in your portfolio, is this: The Market Value of your Equity Investments and that of your Fixed Income investments are totally, and completely unrelated. Each Market dances to it's own beat. Stocks are like heavy metal or Rap.impossible to predict. Bonds are more like the classics and old time rock-and-roll.much more predictable. Thus, for the sake of portfolio smile maintenance, you must develop the ability to separate the two classes of securities, mentally, if not physically. For example, if your July 2005 Market Value fell, it was because of higher interest rates not lower stock prices. More recently, the combination of higher rates and a weaker Stock Market has been a Double Whammy for portfolio Market Values, and a double bonanza for investment opportunities. Just like at the Mall, lower securities prices are a good thing for buyers. and higher prices are a good thing for sellers. You need to act on these things with each cyclical change.

Bank Investment
Here's a simple way to deal with Fixed Income Market Values to avoid shocks and surprises. Just visualize the Scales of Justice, with or without the blindfold. On one side we have a number that represents the Current Market Value of your Fixed Income portfolio. On the other side, we have a small "i" for interest rates, and "up" or "down" arrows that represent interest rate directional expectations. If the world expects interest rates to rise, or even to stop going down, "up" arrows are added to "i" and the Market Value side moves lower. the current scenario. Absolutely nothing can (or should) be done about it. It has no impact at all on the contracts you hold or the interest that you will receive; neither the maturity value nor the cash flow is affected. but your broker just called with an idea.

Alternative Investment The mechanics are also simple. These are negotiable securities that carry a fixed interest rate. Buyers are entitled to current rates, and the only way to provide them on an existing security is to sell it at a discount. Fortunately, one rarely has to sell. Over the past few years of falling interest rates, Fixed Income securities have risen in price and investors (should) have realized capital gains as a result.adding to portfolio income and Working Capital. Now, that trend has reversed itself and you have the opportunity to add to existing holdings, or to buy new securities, at lower prices and higher interest rates. This cycle will be repeated forever.

Online Investment Services So, from a "let's try to be happy with our investment portfolio because it's financially healthier" standpoint, it is critical that you understand changes in Market Value, anticipate them, and appreciate the opportunities that they provide. Comparing your portfolio Market Value with some external and unrelated number accomplishes nothing. Actually, owning your fixed income securities in the most freely negotiable manner possible can put you in a unique position. You have no increased risk from a reduction in security prices, while you gain the ability to add to holdings at higher yields. It's like magic, or is it justice. Both sides of the scales contain good news for the investor. as the investment gods intended.

Accompany Essential Investment Steve Selengut
sanserve@aol.com
800-245-0494
http://www.sancoservices.com
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"

Investment Company

Investment Management Solution Professional Investment Portfolio Manager since 1979, Unaffiliated with any Brokerage Firm - Separate Accounts Only, & No Open End Mutual Funds
BA Business, Gettysburg College, MBA Professional Management, Pace U.
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"

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