A Paycheck Portfolio

09/30/2016 10:00 am EST

Focus: STRATEGIES

Robert Carlson

Editor, Retirement Watch

Robert Carlson is a leading expert on investing for retirement — both for those already retired as well as those planning ahead for coming years. Here, the editor of Retirement Watch explains his strategy and reviews a trio of holdings in his Retirement Paycheck portfolio.

Steve Halpern:  Our guest today is Robert Carlson, editor of Retirement Watch.  How are you doing today Bob?

Bob Carlson:  I'm doing well.  How are you?

Steve Halpern:  Very good.  First, let me tell you what a fan I am of your research.  I really consider your newsletter among the very best in the advisory industry.  Could you tell our listeners a little about Retirement Watch and touch on your underlying investment strategy?

Bob Carlson:  Well on Retirement Watch we try to cover all of the financial issues of retirement and retirement planning so it's not only investments but it's also estate planning, taxes, annuities, long-term care, medical care, and pretty much anything that'll come up in your finances when you're either in retirement or planning for retirement.  

In our investment strategy we have a couple of principals we stick by.  One is a margin of safety.  We realize where we're dealing with our nest eggs there and many of our readers are already retired so we want a margin of safety in everything we buy so we won't chase the market leaders, we won't go for the big winners, and we'll just look for safe, solid returns, and we take a look at basically the market cycle.  

Each asset has its own cycle and we want to buy when it's relatively low and sell when it's relatively high, so we try to follow those two principals in all of our investments.  We also try to stay diversified and balanced so if we're wrong about something it won't drag down the entire portfolio.

Steve Halpern:  Now as you mentioned, many of your subscribers are in retirement. But your newsletter is also very well suited for people who are only planning for retirement.  Is that the case?

Bob Carlson:  Yes.  The subscriber base is about 50/50.  About half of the people are already retired and about half are planning for retirement.  Most of those are somewhere in 10 to 15 years of retirement.  

We have a few who are even younger than that but for the most part it's evenly split between those who are already retired and those who plan to retire sometime in the next 15 years or so.

Steve Halpern:  Now could you talk a little about how retirement investing differs from the general role of investing at a much earlier date in an investor's life?

Bob Carlson:  Well when you're younger you have more time to make up for mistakes so you can take a little more risk.  Also, when you're younger you have the potential to be able to save more over a longer period of time and have the markets do more of your work for you.  If you start saving young and save the same percentage of your income up until retirement age, you'll find that your retirement nest egg is going to be about 70% or more provided by market returns and income.

But if you don't save until you're later in life in a serious way, then most of that money in your nest egg is going to come from your own saving and only a relatively small portion of it is going to come from your gains and income.

So that's two benefits from the younger person -- they have more time to make up for mistakes and they also have more time for the markets to do the bulk of the work rather than their own savings.  

When you're near retirement or in retirement you have to avoid taking any kind of big loss because you might not have the time to come back from that and you have limited ability to go back into the employment market and earn money to make that back, so we always have those points in mind when we're making investment advice.

Steve Halpern:  Now you cover a number of different model portfolios for your subscriber and today we're going to focus on one in particular called the Retirement Paycheck portfolio.  Could you explain the goals here?

Bob Carlson:  Sure.  Traditionally when someone retired they'd move most of their portfolio into income generating investments but they'd be very safe ones such as CDs, money market funds, and short term bonds, but is someone does that now they're not going to make any income.  

They need an enormous amount of capital to generate just a very modest income from those investments today, so someone who wants to generate income from their investments today has to look at a different range of investments.

So we look at things like closed-end funds, preferred stocks, high yield bonds, master limited partnerships, and some others.  That's one point about the portfolio.  

The other point is because of the nature of today's markets you can't just buy and hold these types of investments.  They're very volatile.  Many of them are about as volatile as the stock market.  You have to move in and out of them strategically using about a one to three year timeframe.  

As I said earlier, buy them when they're fairly cheap, sell or reduce your exposure to them when they're fairly expensive, and so you get a decent yield or above average yield from these types of investments.

And if you buy properly, you'll also get some capital gains that'll preserve your purchasing power and enable you to increase your income in the future. And if you sell at a good time, you'll avoid the steep losses that many people have experienced when they try to just buy and hold these kinds of investments.

Steve Halpern:  Now two of the funds that you hold in your Retirement Paycheck portfolio come from the DoubleLine family.  Could you touch on these two funds and how they play a role in the portfolio?

Bob Carlson:  DoubleLine came into business around 2009 and it's been just a very good fund company.  It's put together a number of funds that are really helpful to the income-oriented investor.  

We use DoubleLine Total Return Bond (DBLTX) as kind of the foundation of our portfolios because it pays an above average yield. Recently it is about 3.75%.  A few years ago when we first started in the fund it was yielding 8%. It gets this yield with a very stable asset value.  

It has a number of different mortgage securities and different types of investments in there, and while the individual investments might fluctuate somewhat, on a net affect for the bond fund, it's a very stable net asset value.

So it's like getting a very high yield from a fairly safe investment.  You're getting that 3.75 yield -- which is much higher than your longer term treasury bonds -- but at a very small fraction of the volatility of those long-term treasury bonds so it's a very good deal for the individual investor.  

The DoubleLine Emerging Markets Fixed Income Fund (DLENX); it invests as the name says in emerging market bonds and it gets a very good yield from that.  They pay a higher yield than most of your US Securities. Recently is at 4.75% yield, but it does this in a fairly safe way.  

It has several policies that most of these emerging market bond funds don't have.  It tries to limit its exposure to government issued bonds and it's looking primarily at corporate issued bonds.  

It also looks for companies that it thinks are improving their finances and that this improvement is not yet reflected in the credit rating so if the credit rating firms eventually recognize the improvement, that'll increase the rating and provide a quick boost in the value of these bonds and give us a little bit of capital gain just from that very simple move.  

Also, they look at the individual countries and decides which ones they want to be exposed to and which ones they don't want to be exposed to, and it's not afraid to deviate in a great way from the indexes.  So it does not own any bonds in countries that doesn't like the economies of no matter how much exposure and index has to them.  

Mostly lately it's been exposed to Latin American countries so it benefitted a lot from the rebound in commodities and in Latin American economies in general that's occurred this year.  

And finally, it is not taking any currency risk.  It's only buying bonds that are denominated in US dollars so it's not taking any risk that the individual currencies of these emerging market countries might fall or even collapse the way a number of emerging market bond fund do.  It's just all denominated in US dollars.

Steve Halpern:  And just to be clear for our listeners, which fund are you referring to?  

Bob Carlson:  This is Doubleline Emerging Market Fixed Income.

Steve Halpern:   Okay; I just wanted to make sure there wasn't any confusion there.  Now you also gain exposure to the MPL sector via of ETN called JP Morgan Alerian MLP (AMLP).  Could you explain the reasoning behind this position and also if you could touch on how an ETN differs from an ETF?

Bob Carlson:  Yes.  This is an exchange-traded note.  What this is, is what it says: a note issued by JP Morgan.  It's traded in shares on the stock exchanges just the way an exchange traded fund is.  The main difference is that it's not backed by individual assets. It's backed by a promise from JP Morgan.  JP Morgan promises to pay the investor whatever the return is from the Alerian MLP Index minus the funds expenses, so it tracks the index.  

You get whatever the return of the index is minus expenses plus any yield that's paid out, and it trades as I said.  It's very liquid just like an ETF or a stock but the difference is you're basically trading a promise from JP Morgan rather than the share of any underlying assets.  

I like this as a way to invest in MLPs because it does not have a lot of the tax issues that come with owning individual MLPs rather you own them at a taxable account or in an IRA.  

There are potential tax issues and it's very complicated for a lot of people if you own a large number of MLPs it can really increase the cost of having your tax return prepared each year. 

So this is a simple way to do it and it's also lower cost than some other mutual funds or ETFs that try to avoid the tax problems, but have a higher level of expenses piled on to them.

Steve Halpern:  Now finally, I'd like to let our listeners know that you'll be a featured speaker at the upcoming Dallas MoneyShow and I would definitely encourage them to attend your workshops.  Again, our guest is Robert Carlson of Retirement Watch.  Thank you so much for your time today.

Bob Carlson:  Thank you Steve.

Editor’s Note: Robert Carlson will be a featured speaker at the upcoming MoneyShow Dallas, October 19th through 21. Register for free here.

By Robert Carlson, Editor of Retirement Watch

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