We just finished updating our model portfolios so I thought I would share some thoughts on these models.
Long time readers know that we have always constructed portfolios simply as a learning tool—YES I am 65 and after publishing websites on the topic of mostly preferred stocks and baby bonds I am still learning. If you are rather new to investing in these securities I guarantee you will never stop learning.
We currently are running 4 models–2 on this site and 2 on the DividendInvestor.com website. Today I want to review only the 2 on this site–then in a few days I will review the Dividendinvestor.com website models. The DividendInvestor.com website is owned by the company that bought my old website – The Yield Hunter – and they pay me to do a little work for them yet.
The Medium Duration Income Portfolio is simply a portfolio of baby bonds and term preferreds which mature within 10 years of inception. The portfolio is not meant to be traded–except where absolutely necessary. No flipping, dividend captures etc occur in this model.
Lesson 1 in this portfolio is don’t buy securities issued by tiny untried companies. This portfolio held the Atlas Financial 6.625% baby bonds which mature in 2022. The company really screwed up big time in reserves for losses (they are a small insurance company) and ended up writing off damned near half the equity. Needless to say I sold for a 55% loss on this position. Lesson 2 is that when it walks like a duck, quacks like a duck–guess what? It is a duck. I watched this baby bond plunge from $25 to $17 on first announcement and said to myself “give it a little time” to bounce after the initial overreaction. Well I should have simply sold it, but instead watched it go ever lower. Lesson 3 is simply that in spite of my good fortune running these models over the years with a relatively concentrated portfolio this is a good example of what happens when you have $100,000 spread across only 10 holdings. This one bonehead purchase took 5-6% of performance off the portfolio so instead of being up 8ish% it is up a very poor 2.86% after 16 months.
The overall message is that these models are too concentrated–you can’t be at 10% allocations and not get hammered at some point in time. We will be working to resolve this in the months ahead. This was the number 1 loss I ever had in a model and honestly just plain stupid.
I should note that I did not own any of this security personally–although we had owned it at some point in time.
The Enhanced High Yield Model Portfolio has performed quite well relative to our modest goals. After 17 months the model is up almost 10%–so it is tracking right on goal–7% annually.
We don’t have any clear cut new lessons to be learned from this portfolio, but we know that it is too concentrated just like the other portfolio–only 11 issues are in the model and it should be double that (or even more). This portfolio holds the hated Spark Energy 8.75% perpetual preferred which traded down to $18 last year, but now has bounced back–we may have dodged a bullet with this kind of junky issue so we need to address that situation.
For us personally we take these lessons quite seriously–sometimes you get a bit cocky, but buying a total loser knocks you down a few rungs. If I can get 6-7% year after year I would be happy—very happy.