“Right now, it’s better to have a defensive mindset than an offensive one.”
That’s what I told you last week when I detailed the risk of rising debt defaults.
Some of you asked if there’s still a safe way to get into high-yield bonds even as defaults increase.
Here at Stansberry Research, we have a service dedicated to buying high-yield, distressed-debt called Stansberry’s Credit Opportunities. My good friend and publisher, Porter Stansberry, and his team of analysts created this service with the goal of finding bonds that yield between 10% and 20% annually and have the potential to earn subscribers 50% to 100% capital gains at maturity.
You would think an increase in covenant-lite loans and a looming default cycle would worry them, but here’s the thing…
They’re actually excited.
With defaults typically come downgrades. And downgrades are the best thing for high-yield, distressed-debt investors. The price of safe bonds will fall dramatically, sometimes trading for pennies on the dollar.
And by safe, I mean Porter and his team will not recommend a bond unless they are satisfied the borrower has enough resources to pay the interest on the bond and redeem it in full at maturity. So they buy cheap, get paid in full at maturity, and collect a healthy yield along the way.
Credit defaults are coming sooner rather than later, which will be great for Porter’s strategy. If you have any interest in high-yield debt, now is a great time to learn and get started. There’s massive gains to come.
In fact, as Porter often says, once you buy a bond and see how easy it is to beat the stock market with far less risk, you may never want to buy a stock again.
Thanks for all the great questions you’ve sent this past week. We’re working on answering them in future issues. And make sure to keep sending them our way… [email protected].
Q: Regarding your e-mail from February 6 of this year…
I find that I am sensitive to salt in my diet. I’ve had to cook my own chicken, beef, etc. rather than use cold cuts from the store. This is the only way I’ve gotten my pressure under 130. Also try to remember to order restaurant meals cooked “with no added salt.”
I’ve given up coffee, other than a cup of decaf if I go out to breakfast; even decaf will raise my pressure by 15 points.
Discouraging, but so is high blood pressure.
Just wanted to bring up the salt connection. – L.W.
A: Salt and its harmful effects show up statistically on what is called a U-shaped curve, also called the “Goldilocks” curve. In other words, too much is bad and too little is bad.
And remember, low magnesium and potassium levels in Americans’ diets are probably a major component of high-blood-pressure problems. That’s because these minerals are just as important as sodium for regulating blood pressure. Three foods that pack in potassium and magnesium all at once are fish, avocados, and bananas.
Also, not everyone responds to salt the same way.
If you have any kidney diseases or a common illness that affects your kidneys (such as diabetes), you should avoid going crazy on a salt binge.
There’s also a genetic factor that most government regulations fail to acknowledge. Some folks are genetically “salt-sensitive.” That means their genetic makeup makes them more likely to be affected by higher salt intake than others. In fact, a study from the University of Virginia reported that about 25% of Americans are salt-sensitive.
Stress is another common factor… Studies have linked stress to the buildup of arterial plaque, which leads to high blood pressure.
If you’re fighting high blood pressure, consider the various factors that could be contributing to your blood pressure.
Q: You talk about buying closed-end funds at a discount to [net asset value] NAV. It seemed to make sense until I looked at the suggested website www.cefconnect.com, where they have graphs showing the price action and NAV of the funds.
Invariably, the funds selling at a discount to NAV have been doing so habitually, and NAV has just as much variability as the price. The graphs show NAV and price fluctuating in a parallel manner. Therefore buying a closed-end fund just because it is selling at a discount to NAV does not seem improve the chances that the price will rise.
Am I not understanding something here? – M.H.
A: You’re right… You can’t just buy a closed-end fund strictly on how it’s trading to its NAV. We look at many factors before deciding to buy a fund. I look at the holdings, the turnover rate, and the leverage.
Regardless… under most circumstances, the fund’s share price should eventually return to NAV. When the price reflects a discount to NAV, one of two things is likely to happen… Either the market will realize the fund is underpriced and drive the share price up, or the fund managers will get shareholder approval to buy back shares with extra cash and remove the discount.
In either case, the share price is certain to rise. All you have to do is buy it, hold it, and wait. And as a general rule of thumb, avoid funds trading for more than their NAVs. Why would you want to pay $1.20 for something that’s only worth $1?
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Q: I understand to put no more than 5% into any one investment using a trailing stop loss. How often should I rebalance my portfolio? Is monthly enough? – A.K.
A: This is a great question… and I rebalance mine at least once a year. I’ll do it more frequently if certain categories have moved particularly quickly. But in general, even with a few great picks, most people don’t need to rebalance more than three or four times a year.
Imagine an investor has a $100,000 portfolio with 20 investments ($5,000 each). If one position goes up 25% in a year – a strong one-year return – you now have a portfolio worth $101,250 and your one position is up to $6,250. Your investment is just 6.17% of the total.
Sure, you can rebalance back down to 5% at this point, but I wouldn’t worry about it until a successful position like this started to approach 10% or 15% of your portfolio. And remember… trailing stops will protect the gains, too.
The bottom line is that the 5% rule is really meant to create awareness for investors when initially placing money on new investments… i.e., don’t put all your eggs in one basket.
What We’re Reading…
- Something different: See the birth of a planet.
Here’s to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
July 6, 2018