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Save $200k and buy a 33% leveraged muni bond closed end fund, which are currently yielding approx 6% tax free at a 10% discount due to the recent bond selloff.

by gfodor 13y ago

Save $200k and buy a 33% leveraged muni bond closed end fund, which are currently yielding approx 6% tax free at a 10% discount due to the recent bond selloff. Disclaimer: if interest rates rise you will be unable to reclaim your principal but, generally speaking, this income stream should be pretty safe for the foreseeable future. And of course, $1000 a month today is not going to be as much in the future if inflation returns to 3%.

dustyleary 13y ago
Can you give an example of funds like this? Maybe instructions on how you would search for them?
- smartician 13y ago
  NAD would be an example, or, if you're in California, NAC (state tax free, but geographically concentrated in CA). There are other bargains out there now too, because of fears of the Fed tapering down QE, anything that yields >5% got hit hard in the recent weeks. Even foreign, emerging market bonds. ESD for example trades at a 7% discount and yields 7.5% at the moment. For research, Morningstar is a good starting point: http://cef.morningstar.com/quote?t=esd http://cef.morningstar.com/quote?t=esd
adventured 13y ago
Doing this at the point in time in which money is about as cheap as it has ever been in history due to hyper QE to hold down rates, is a very, very bad idea. It's not a question of if rates will rise. They're going to rise a lot, because every day that goes by the cost of artificially suppressing rates gets more expensive (which is why the Fed has had to keep expanding their QE program). Equal but opposite reaction, is what will occur, conceptually. To the extent they've created hyper cheap money, is the extent to which money will be expensive, sooner than later I'd argue. The bond bubble is nearing an end. If the Fed wishes to continue it, it's going to cost trillions worth of new inflation, setting up a damned if you do, damned if you don't scenario. The era of cheap money is over. If you want to earn a return on your $200k, wait for the inevitable disaster that follows these insane central bank policies. Swoop in with your pile of cash and pick up dirt cheap assets after the next crash. Or go after yield as rates skyrocket in the next five years.
- gfodor 13y ago
  You have no idea if this is true, this is 100% speculation. Rates could rise dramatically, they could rise gradually (which is the most likely scenario), or they can stay at 0% for the next 10 years. This is why buying a bond fund at a deep discount (these are at 10% discount as we speak) provides a nice cushion for all cases except the catastrophic "yields rise quickly" scenario. If you are worried about that, you should be setting aside some cash to try to time the market.
  - adventured 13y ago
    No, it's not 100% speculation. Although that's an amusing claim, because your own parent post would fall under your same position of being 100% speculation if you were in fact right. However, your premise requires a world in which nothing can truly be known for certain and all outcomes are equally likely. Such is not the case; not even remotely the case. Rates cannot stay at 0% for the next 10 years, the math involved won't allow for that scenario. The Fed is already having their hand forced right now, as is easily demonstrated by the huge spike in bond yields, oil being at $100, housing and stock prices skyrocketing due to asset inflation generated intentionally by the Fed (as they openly said they wanted to have happen). It's a repeat of the last asset bubbles they brewed, and for exactly the same reasons, only this time it's 100% intentional. The clock is rapidly running out on their fraudulent game. They're already being wedged between a rock and a hard place; continue the policies of cheap money, and assets go so high they rip the economy apart upon implosion, again; stop the policies, and the economy implodes instantly. Rates skyrocket either way, as the bond buyers begin demanding higher yields to compensate for worsening inflation with continued QE; or rates skyrocket as the Fed stops QE and stops artificially holding down rates. You might as well claim that rates can stay at 0% forever, or for 1,000 years, or for 100 years. Again, your position requires the premise that all outcomes are equally possible, and that is not true. It's obvious the era of cheap money is ending. The era of expensive money is about to begin, as it must by the basic laws of economics (which is in fact a science, despite the many witch doctors in the field).
    - gfodor 13y ago
smartician 13y ago
That was my strategy for the past years, except the muni bonds are just one egg in the basket. I also hold business development companies, REITs, a high dividend stock ETF, corporate junk bonds (US and international). Right now I'm earning around $1,200 per month from $200k principal.
- tocomment 13y ago
  What REITs do you like? What are the most pressing risks you see with REITs right now?
  - smartician 13y ago
    If I could only buy one, I would choose RWO. Relatively low fee (0.5%), both domestic and international exposure. But it "only" yields 3.75%. For more of an income play I'd look at IGR (yields more than 6%, trades at a 7.5% discount currently). Another one I'm watching is "O". Risks: Prices can swing wildly due to any number of reasons. Rising interest rates can depress real estate prices in the near term. Income should stay fairly stable though in my opinion, so I'm taking the long term view and try not to obsess about daily price volatility. I wouldn't put more than 5-10% of my capital into REITs.
    - tocomment 13y ago
      Thanks. What do you think of PMT? I can't get past the 11% yield. I guess there are some pretty big risks there to justify that yield?
      - smartician 13y ago
        Looks like PMT is an mREIT (mortgage REIT), so instead of physical properties they buy mortgage loans. Different ballgame in the same stadium, so to speak. There are others: AGNC yields 20%, CYS 16%. I used to have an ETF that holds a portfolio of these (REM), which might be a good way to diversify as they all have slightly different strategies for investing and hedging. I got out recently, it's just too unpredictable. These funds achieve their high yield by being leveraged 10x-20x, so any impact from external factors like interest rate spread and policy changes is highly amplified. Though I still have some exposure to the sector through other funds like AWP and SDIV.

by gfodor 13y ago

dustyleary 13y ago

Can you give an example of funds like this? Maybe instructions on how you would search for them?

smartician 13y ago
NAD would be an example, or, if you're in California, NAC (state tax free, but geographically concentrated in CA). There are other bargains out there now too, because of fears of the Fed tapering down QE, anything that yields >5% got hit hard in the recent weeks. Even foreign, emerging market bonds. ESD for example trades at a 7% discount and yields 7.5% at the moment. For research, Morningstar is a good starting point: http://cef.morningstar.com/quote?t=esd http://cef.morningstar.com/quote?t=esd

adventured 13y ago

Doing this at the point in time in which money is about as cheap as it has ever been in history due to hyper QE to hold down rates, is a very, very bad idea. It's not a question of if rates will rise. They're going to rise a lot, because every day that goes by the cost of artificially suppressing rates gets more expensive (which is why the Fed has had to keep expanding their QE program). Equal but opposite reaction, is what will occur, conceptually. To the extent they've created hyper cheap money, is the extent to which money will be expensive, sooner than later I'd argue. The bond bubble is nearing an end. If the Fed wishes to continue it, it's going to cost trillions worth of new inflation, setting up a damned if you do, damned if you don't scenario. The era of cheap money is over. If you want to earn a return on your $200k, wait for the inevitable disaster that follows these insane central bank policies. Swoop in with your pile of cash and pick up dirt cheap assets after the next crash. Or go after yield as rates skyrocket in the next five years.

gfodor 13y ago
You have no idea if this is true, this is 100% speculation. Rates could rise dramatically, they could rise gradually (which is the most likely scenario), or they can stay at 0% for the next 10 years. This is why buying a bond fund at a deep discount (these are at 10% discount as we speak) provides a nice cushion for all cases except the catastrophic "yields rise quickly" scenario. If you are worried about that, you should be setting aside some cash to try to time the market.
- adventured 13y ago
  No, it's not 100% speculation. Although that's an amusing claim, because your own parent post would fall under your same position of being 100% speculation if you were in fact right. However, your premise requires a world in which nothing can truly be known for certain and all outcomes are equally likely. Such is not the case; not even remotely the case. Rates cannot stay at 0% for the next 10 years, the math involved won't allow for that scenario. The Fed is already having their hand forced right now, as is easily demonstrated by the huge spike in bond yields, oil being at $100, housing and stock prices skyrocketing due to asset inflation generated intentionally by the Fed (as they openly said they wanted to have happen). It's a repeat of the last asset bubbles they brewed, and for exactly the same reasons, only this time it's 100% intentional. The clock is rapidly running out on their fraudulent game. They're already being wedged between a rock and a hard place; continue the policies of cheap money, and assets go so high they rip the economy apart upon implosion, again; stop the policies, and the economy implodes instantly. Rates skyrocket either way, as the bond buyers begin demanding higher yields to compensate for worsening inflation with continued QE; or rates skyrocket as the Fed stops QE and stops artificially holding down rates. You might as well claim that rates can stay at 0% forever, or for 1,000 years, or for 100 years. Again, your position requires the premise that all outcomes are equally possible, and that is not true. It's obvious the era of cheap money is ending. The era of expensive money is about to begin, as it must by the basic laws of economics (which is in fact a science, despite the many witch doctors in the field).
  - gfodor 13y ago

smartician 13y ago

That was my strategy for the past years, except the muni bonds are just one egg in the basket. I also hold business development companies, REITs, a high dividend stock ETF, corporate junk bonds (US and international). Right now I'm earning around $1,200 per month from $200k principal.

tocomment 13y ago
What REITs do you like? What are the most pressing risks you see with REITs right now?
- smartician 13y ago
  If I could only buy one, I would choose RWO. Relatively low fee (0.5%), both domestic and international exposure. But it "only" yields 3.75%. For more of an income play I'd look at IGR (yields more than 6%, trades at a 7.5% discount currently). Another one I'm watching is "O". Risks: Prices can swing wildly due to any number of reasons. Rising interest rates can depress real estate prices in the near term. Income should stay fairly stable though in my opinion, so I'm taking the long term view and try not to obsess about daily price volatility. I wouldn't put more than 5-10% of my capital into REITs.
  - tocomment 13y ago
    Thanks. What do you think of PMT? I can't get past the 11% yield. I guess there are some pretty big risks there to justify that yield?
    - smartician 13y ago
      Looks like PMT is an mREIT (mortgage REIT), so instead of physical properties they buy mortgage loans. Different ballgame in the same stadium, so to speak. There are others: AGNC yields 20%, CYS 16%. I used to have an ETF that holds a portfolio of these (REM), which might be a good way to diversify as they all have slightly different strategies for investing and hedging. I got out recently, it's just too unpredictable. These funds achieve their high yield by being leveraged 10x-20x, so any impact from external factors like interest rate spread and policy changes is highly amplified. Though I still have some exposure to the sector through other funds like AWP and SDIV.