I sat on the trading desk at Goldman Sachs when the markets collapsed in 1987.
I saw fortunes made during those days. Too young and naïve then to make much myself, I watched the veteran traders around me. They taught me one valuable lesson: When investments go on sale at end-of-the-world prices, step up and buy.
It’s vital you shake the feeling that things are getting riskier. They aren’t. The drop in stock prices means things are less risky, not more risky. In fact, it’s turned one of my favorite “benefit in any scenario” investments into an even better deal. Let me explain…
[ad#Google Adsense 336×280-IA]Two months ago, I showed you how “convertible bonds” can be a great choice no matter what you expect the market to do next.
Convertible bonds pay interest like a regular bond… And just like traditional bonds, the payments are more secure and bondholders have priority in bankruptcy proceedings. But they give the investor the right to convert his bonds to common stock – which makes the bond’s value rise if the company’s share price increases.
In other words, they carry the upside potential of stocks without relinquishing the safety of a bond. And that combination is even more valuable today…
You see, the “convertible” feature in a convertible bond is like a free, long-dated “call option.” The more volatile stocks are, the more expensive options get. So with today’s jumpy stock market, convertible bonds are worth more than they were when the sailing was smooth.
At the same time, because convertible bond investors know they’ll keep collecting income, they’re less nervous about hanging on through troubled times. So the fixed-income part of a convertible bond stabilizes its price. That’s worth a lot when most stocks are rising and falling several percent every day.
Plus, interest rates have dropped since my last essay. With government bonds paying next to nothing, the income you’re collecting from convertible bonds is all the more attractive.
And finally, when things hit a rough patch, it’s even more important to have your portfolio diversified. Because a convertible bond has the characteristics of both a stock and a bond, you’re spreading your money across asset categories.
[ad#article-bottom]In my previous essay, I told you about the Nicholas Applegate Equity and Convertible Income Fund (NIE), a collection of convertible bonds. My Retirement Millionaire readers have made more than 60% on this fund in a couple years. It pays 6.8% a year in distributions. And it holds convertible bonds from high-quality companies like Intel, McDonald’s, and Apple.
You can also find individual convertible bonds trading just like stocks. My colleague Tom Dyson, who has spent years analyzing income investments, uses www.quantumonline.com to track them down. (It’s free, but you’ll have to register a username and password to get access.)
With the market the way it is today, you may be feeling afraid. That’s normal. But at times like this, it’s critical to step back and focus on time tested-methods of making money.
These include diversifying yourself, making sure you get paid, keeping your money in safe assets, and buying when the time is right.
All these are lined up for convertible bonds right now. Don’t miss it.
Good investing,
— Doc Eifrig
[ad#jack p.s.]
Source: Daily Wealth