4 Key Paths to Portfolio Flexibility in 2009

Just about everybody who has an opinion on the markets has offered their view on the upcoming year. In a previous post, I rostered income producing bond and preferred stock ETF holdings I owned. I deliberately neglected to offer proportion, as this is an individual choice, not for me to cloud.

Moving on with my investment scheme, I offer further observations and some investment vehicles that are in my world for 2009 and beyond.

Taxes

First, avoiding taxes. Investors can only profit from what is kept. I have pounded the table in previous posts that financial planners had better begin to advise and show evidence of appropriate products to implement tax avoidance tactics over and above hot stock picks and micromanaging asset allocation. Creating LLCs, portfolio and income splitting and other tax reduction plans to protect and expand family asset protection is vital. So long as IRS rules are followed, fear not. However, beware of new and improved tax shelters. My rule is simple: if it sounds too good to be true and you don't understand all the details, pass. Uncle Sam will be looking out for these with a vengeance as our treasury coffers need to be replenished with your money. If your financial guru does not present tax reduction procedures as Plan 1, fire 'em.

Bonds and Preferred Stocks

Second, proportional bond and preferred stock securities. Season your portfolio to taste from amongst the following (see my December 26th post for rationale):

(IDV) - IShares Dow Jones Select EPAC Dividend Fund ETF
(BWX) - SPDR International Treasury Bonds ETF
(BSV) - Vanguard Short Term Bond Fund ETF
(LQD) - IShares Investment Grade Corporate Bond ETF
(PFF) - IShares Preferred Stock Index ETF
(SHY) - IShares 1-3 Year Treasury Bond Index ETF
(TIP) - IShares Treasury Inflation-Protected Securities ETF
(PGF) - PowerShares Preferred Financial Portfolio ETF

I am lightening up a bit on treasuries and stretching to a larger position in corporate bonds and preferred ETFs. History has shown that when the government runs the money presses white hot 24/7, inflation is a matter of when, not if. TIP provides an answer to this situation.

More than a few readers have e-mailed me regarding ProShares' double shorts/longs. While I admit to maintaining a micro speculative position with these instruments a few times, I do not recommend them. I am not sure they perform as advertised, and am very sure that these will be highly regulated in the future.

ETFs

Third, don't chase stocks. Sit back with some ETFs and a pseudo-ETF stock or two and gradually add as you see fit. Here are several I own or am following for an entry point.

(EWL) - IShares MSCI Switzerland Index ETF
(IAK) - IShares US Insurance Index Fund ETF
(MDU) - MDU Resources (common)
(EWS) - IShares MSCI Singapore Index Fund ETF
(SLV) - IShares Silver Trust ETF
(BBT) - BB&T Bank (common)
(AOM) - IShares S&P Moderate Allocation Fund ETF - especially noteworthy
(PTO) - PowerShares International Growth ETF
(RJI) - Swedish Exportcredit (Jim Rogers' commodity fund)
(PHO) - PowerShares Water Resources ETF - good infrastructure play

Rental Real Estate

Fourth, rental real estate. Tax benefits liberals and conservatives won't touch, write-offs, depreciation and holding a tangible asset that pays you very well every thirty days. Not for everybody's temperament and must be self-managed to extract the maximum benefits.The media's description of a brutal real estate market be damned, my holdings have been sterling and performed much better than the pundits' chant. Only the over leveraged or the usual critics who are not in the business seem to criticize this part of my investment scheme.

Holistic portfolio management means that the investor should not be content with a stock picking service, double wide computer screen and a twitching hand ready to BUY BUY BUY. Tax avoidance, income streams cascading from several directions, ETFs and like-type investments along with active tangible assets you manage may deliver a satisfying investment result for 2009 and beyond.

Comments

[willydo:]

On these high income etfs, I have a question about selling them. I own a few of these types that pay anywhere from 7 to 18% when picked up at recent prices (PFF, PCF, FCO, FAX, REZ, etc.). So as these trend up and let's say they spike fairly high during a Bear rally where you are up maybe 25-30% and then start to come down again.
Should I hold them as long as they don't break my initial buy price because the long term payouts could be so high or should I sell just like any other stock and try to get back in at the lower price????
Thanks,
Willydo

Jan 12 08:22 AM

[donzelion:]

Why the multiple corporate bond funds rather than one aggregate fund like AGG or BND? And wouldn't you want to put those funds in an IRA or 401K?

Jan 12 12:34 PM

[sail:]

You've answered your own question. If you've picked them up while they're down, you expect a bear rally and then another price collapse.

It's not quite buy high, sell low - or was that buy low, sell high? If you're looking for a revenue stream, then you've got it.

If you're a trader, you've already set the strategy. buy low, sell high, buy back lower. Just from your note, you are cut out to be a trader. So if you see a peak, you might want to sell and buy back lower. or just stay away.

This kind of arbitrage works for quants, not for the average investor. It does make sense to pick one good aggregate if for no other reason than less to keep up with.

The cost of trading and taking short term gains can kill any profit you thinki you're to have.

Jan 12 03:25 PM

[me3debby:]

I may be retiring in May at 62 years. I'd like to invest $100,000 to provide additional income along with my $1600 monthly social security. Any suggestions.

Jan 12 05:55 PM

[willydo:]

Hey me3debby,

There was a great article in Kiplingers about how to invest 100k for income streams. They give you about 3 different senarios depending on your needs etc.
The article is called "Investments that pay you every month" and can be found here: www.kiplinger.com/colu...

Jan 12 08:48 PM

[willydo:]

Sail,
Thanks for the comments. I guess I am looking for an income stream as I am nearing retirement and envy people who talk about holding xxx or yyy MLP fund etc for the last 10 years making 7-10% per year. So it would be great to hold dividends like that but these etf's are also making good capital gains as well.

The only danger in selling them is that it is not always easy to get back in, as you know. I definitely would sell them if they drop below the purchase price but if they are paying 10%, they double in value every 7 years!
Thanks

Jan 12 08:55 PM

[Thomas Smic...:]

Any retirement funds that of necessity income oriented should include a suitable mix of the preferred ETFs such as PFF for a higher yield, blended corporates and treasuries, not forgetting TIP. Inflation is the 600 pound gorilla in waiting, imo. Don't forget the tax man cometh, sooneth, and shield that income.

No need too buy my entire list. Pick and chose a small portfolio you are comfortable with.

Jan 12 11:20 PM