Our 2015 Model Portfolio – Blended Income

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We have now settled on our 2015 Model Portfolio – Blended Income.

It is noted that this is new portfolio contains many of the same issues as our 2014 Model Portfolio – Blended Income.  This makes a fair level of sense as we tend to stick with what we know (or with what we think we know).  Additionally, we really believe that the way to success is more about sector composition than it is about particular issues.  For instance, 2014 was highly successful because we didn’t have MLPs when the huge downturn came to that income arena and because lower quality (high yielding) perpetual preferreds did quite well.  We were well positioned. Business Development Companies (BDC’s) didn’t do very well, but we were just lightly exposed.  REIT’s did well and we were exposed but not in a giant way.  So in the end the lack of exposure to MLP’s kept us strongly in the game.

Additionally, we didn’t hold cash above a 12% level during the year–you can not win the game if you choose not to participate.  Now obviously there are times ‘cash is king’, but our experience in 44 years of investing is these periods are relatively small time periods–and none of us know in advance when these times are going to occur.  

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The new 2015 Model Portfolio – Blended Income contains very modest exposure to perpetual preferreds, high exposure to exchange traded debt with short/medium durations and a higher level exposure to commons stocks and REIT’s.  We cut both CEF’s and BDC’s down to a minimum exposure, although we really like BDC’s they haven’t performed and we do not have an adequate level of confidence in them performing better in the months ahead (although we always reserve the right to change our minds).

Obviously this model makes an assumption that rates will move somewhat higher sometime in 2015–and we may well be wrong about that actually happening.  Our personal observation is it will be late in the year–if it happens at all.  The global economic situation certainly would say that low rates are here for at least another year.  Inflation in the U.S. would also seem to indicate there is no need for upward movement. Additionally, there is no reason that a move up in the very short term discount rate needs to move long term rates higher.  We have noted–for instance during the 2013 ‘taper tantrum’ that preferred stocks react most unfavorably to sharp moves up – with emphasis on sharp.  During the tantrum investment grade preferred stocks got slammed very hard–but a year later with rates (as defined by the 10 year treasury) at near the same level seen during the tantrum investment grades preferreds had risen back to the level they were at when the tantrum 1st occurred.  So it was the speed of the rise in rates–not the level which was most damaging. Additionally studies show that stocks in general have as much chance to rise as fall 6 months after a rate increase–so let’s not overemphasis longer term damage to stocks based upon higher rates.  So we address the unknown as prudently as we can–shortening durations while only losing 1/2% yield to our caution.

We have more exposure to common stocks and REIT’s then we had last year.  Certainly some will make the arguments that either REIT’s are overbought or that stocks are 7 years in to a bull market and due for a correction.  We reply with maybe/maybe not.  Recall that 100% of experts have called for higher interest rates for 2 years now–and instead we have lower rates. Virtualy every expert has called for a ‘real correction’ in the stock market or 10-20% for years now–it hasn’t occurred.  Will it occur in 2015?  We don’t have a clue and neither does anyone else.  This is a thinking persons market.  Forget the experts that were correct last year.  Forget the 1 hit wonders that got lucky once in the last 20 years (i.e. Meredith Whitney, John Paulson etc). You are your own expert now with a very specific set of needs and desires and you are charged with being responsible for your investment goals and outcomes.

We are income investors and we have a goal of a 7% return.  That is what matters to us today.  We are not geniuses and we are not miracle workers so like everyone out there we are going to do the best we can to make our goal–we pray we can avoid the obvious errors and other pitfalls awaiting us. 

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