John Reese selects stocks based on a detailed historical analysis of the strategies of many of the s...
Portfolio Protection Made Easy
03/25/2013 9:00 am EST
Here are some strategies to protect-and grow-your portfolio, outlined by Richard Band of Profitable Investing.
Nancy Zambell: My guest today is Richard Band, the editor of Profitable Investing. Thank you for joining me, Richard.
Richard Band: Nancy, always good to be with you.
Nancy Zambell: Recently, I read in one of your journals that you are a little concerned about insider selling-that it was a little lopsided versus insider buying. Could you tell us about that, and also, what your market outlook is?
Richard Band: Nancy, I look at insider selling as kind of an intermediate-term indicator. It is not going to tell you where the absolute long-term highs and lows in the market are, but it's a good trading guide for the intermediate term-let say, for a three- to six-month period.
What I am seeing now is that the insiders-the officers and directors of America's publicly-listed corporations-are selling their own stock at an abnormally rapid clip. About six shares are being sold now for every share that they purchase.
Whenever you get up to that sort of ratio, it usually means the market is approaching an intermediate-term top-the kind of peak that will hold for, perhaps, three to five months. I'm cautioning people to expect a pullback. And there are things you should be doing with your portfolio now, in view of that risk.
Nancy Zambell: Some ways to protect it in the short term?
Richard Band: Exactly. Some folks are going to do things like short selling, buying put options, and things like that. I'm not really that kind of an aggressive trader, but what I do suggest is take a little money off the table. So, what kinds of stocks would you be selling in here?
- Stocks that have done exceptionally well for you, that have perhaps risen 1.5 to two times as much as the market so far this year. For example, if the S&P 500 is up about 9% this year, and if your stock is up 15% or 18%, you might want to take some profits here.
- Stocks that have lagged the market for a long time. If you picked out a chart of your stock and found that it hadn't made a new high in 18 months or even two years, then I would say I have given it enough time and I am going to exit that stock now.
Nancy Zambell: So you don't really have to get too esoteric with derivatives or anything like that in order to protect your portfolio.
Richard Band: I don't think so. One thing we are recommending to people if they do want to be a little more active as traders, is to perhaps buy some Treasury bonds-by means of the iShares Barclays 20+ year Treasury Bond Fund (TLT) exchange traded fund.
You could buy that and hold it until the storm passes, and I think you will find that Treasury bond prices will rise pretty much in step with a decline in the stock market. That is a little bit of an insurance trade that you could put on if you wanted to, but it is strictly optional.
Nancy Zambell: I know you are also a fan of stocks with income. Would you be a buyer right now of stocks that had pretty decent dividends?
Richard Band: A lot of stocks, Nancy, have gone out of our buy ranges, but there are still a few interesting special situations that I would like to share with your listeners.
One particular category that interests me is the European oil stocks-specifically those domiciled in the United Kingdom. I am not that interested in French or Italian oil stocks, but the UK oil stocks are attractive to me, because the United Kingdom does not impose a withholding tax on dividends. So I can hold these in my retirement account, and I don't lose any of my income to that withholding tax.
There are two that I like in particular. Royal Dutch Shell (RDS-B)-the class B shares based in London, so that you don't have that withholding tax. And BP (BP), also based in London. Both of these stocks are yielding about 5% in quarterly dividends, and are very much eligible for your IRA.
I like both because they are world-class oil companies, just like Exxon (XOM) and Chevron (CVX), but they are selling at much, much lower valuations. If you look at the price-to-book-value ratio, these British oil companies are selling at a big discount to the American oil companies, and are paying great dividends. I am buying Royal Dutch Shell at $71 or less, BP at $43 or less.
Nancy Zambell: Are there any corporate bonds that you would be in the market for right now?
Richard Band: I am buying a few corporates, and this doesn't sound like Richard Band the safety nut, but actually, I do like to buy some junk bonds. I don't like that term, because I think it misleads people.
Back in the 80s, a lot of the companies that issued high-yield debt were junky companies with very poor business models. But these days, the whole market has evolved, and many of the high-yield companies are very solid organizations that you would have heard of and perhaps have even done business with.
I tend to call them just high-yield bonds. And to protect myself against a fall-which is always the big risk with high-yield bonds-I like to focus on mutual funds that buy high-yield bonds with short maturities. That's less time for the companies to get into financial difficulty, if you want to put it very simply.
My favorite fund in this category is Wells Fargo Advantage High Income Fund (STHYX). They keep an average maturity of 4.9 years, so it doesn't give these companies too much time to get into financial trouble, and that's what I like.
This fund is paying 5.4%, so that is certainly a lot better than you can get in the bank. And it's a lot better than you can get in the treasury market. STHYX has a pretty low minimum of $2,500, and there are no sales charges-a no-load fund. It's a place where you can get more value for your money than you could with most bonds.
Nancy Zambell: Sure, and you don't have to spend $100,000 to buy one.
Richard Band: Exactly, and it has a good record. I would invite your listeners to study the Morningstar reports on it, and I think they will be surprised how well this fund has done, particularly during the tough times.
Here's a little tip: If you're looking to purchase any mutual fund-whether it is in the bond or equity area-check the performance record to see how they did in 2008. Did they perform better than the peers in their category? Did they perform better than, say, the S&P 500, if they were a stock fund? Those are the funds, I think, that will treat you well in the months and years ahead.
Related Articles on INCOME
Periodic bouts of red ink, or larger declines like 10% corrections and even 20% bear markets, are a ...
For investors searching for higher yields, there is the challenge in analyzing whether dividends are...
Johnson Matthey (JMPLY), the 200-yr old U.K. refiner of gold and platinum metal catalysts which are ...