I just wanted to write a bit about what I am trying to accomplish in our portfolios for 2025.
As always I have a goal for a return for the year–historically I like 7%. Why 7%? It is a number that simply has worked over many years–it covers inflation and then is 3-4% above the inflation rate. But like everything in investing one has to stay flexible.
The 7% goal worked fine for many years as interest rates trended lower for literally decades. We had lots of perpetuals or baby bonds from which to choose to get the goal (or near it at least). Unfortunately if one had some cash there was no place to go with it that paid any interest–years and years at or near zero. Additionally as we got late in the interest rate downtrend we started to see lots of investment grade preferreds being issued with coupons as low as 3.9%—ripe for massive losses if interest rates started moving higher. Interest rates hit their lows in the summer of 2020 and then moved higher-we got hammered and took some portfolio heat–no 7% in 2020–or 2021. While both years were decently green (depends on your definition of ‘decent’) they were a long way from 7%. Then 2022 came and slammed pretty much everybody–we were off around 6% in 2022.
2023 and 2024 were very good years for many income investors. With higher interest rates we could nail down a portfolio base with CDs, MMs and Treasury bills in the 5% area and balance it will some short duration term preferreds and baby bonds, and a modest number of perpetuals which worked very well. If we could all replicate 2023-2024 we would all be multi-multi millionaires.
As I looked at 2025 I could see interest rates falling some–not dramatically, and I feared that the huge demands of the Federal government Treasury would push rates back higher. With CDs, MMs and short term Treasury bills only providing coupons of 4-4.5% to make a 6% goal (reduced from my normal 7%). I needed to balance those vehicles with issues in the 7.5-8% area. This leads me to term preferreds and baby bonds with short dated maturities. Unfortunately I did keep a sprinkling of perpetual preferreds which has made it somewhat difficult to maintain portfolio balances that are much ‘green’.
Thus far in 2025 our portfolios saw January up 1/2%, February up .6%, but March is now at exactly break even. So we are on pace to almost make our 6% goal–to beat the goal I will need to be able to identify perpetuals to buy that will move higher and give decent capital gains when (if) we gain a sustainable move lower in interest rates.
Now I aware many of the folks on the website are looking for a decent income flow and are not so sensitive to account balances. Personally we don’t draw any money from retirement accounts (excepting our 2 non contributory General Mills pensions) and don’t currently have plans to do so until I am forced to with minimum distributions. I get great satisfaction out of hitting my goals so I set goals and work hard to hit them–BUT I don’t take giant risks. I will take 3-4% if necessary if it means I can sleep at night and avoid giant capital losses.
So right now I am fine with a fairly large CD allocation and the balance with the term preferreds and baby bonds plus a sprinkling of perpetuals. I am watching interest rates closely to maybe identify a buying time for those low coupon, high quality preferreds which are trading in the ‘teens’—they hold the key to a potential 7-8% return year if we can squeeze 4-8% capital gains out of some of these issues. We’ll see.
