While we have lots and lots of very seasoned readers on this site we also have quite a few newer investors visiting this site–with 1000’s of daily visitors you know a lot of them are new to preferred and baby bond investing.
While none of us have a crystal ball that is good enough to foresee the future 100%, us more seasoned income investors do have some history that helps to guide our investing in turbulent times.
Newer investors in preferreds and baby bonds need to resist the urge to get out of markets that are tumbling (stock markets). Historically shorter term movements in common stock prices will have little affect on preferreds and baby bonds. For instance the 1-2% drop we are experiencing now is mostly inconsequential. On the other hand if we were to get 1,000 point drops in the Dow Jones Industrial Average 3 days in a row we would see some ‘dumping’ of preferreds and baby bonds as investors subscribe to the “sky is falling” calls from some pundits. Almost without fail if these ‘dumps’ occur they are buying opportunities–not a time to run for the hills.
Now with that being said we are not saying investors should buy preferreds and baby bonds without having a plan. For instance we have maintained a large portion of shorter maturity issues in our portfolio for a long time–not buying many perpetual preferreds (which have no maturity date). So term preferreds and short dated maturities in the baby bond arena is where I mostly ‘play’. For this I give up some potential income as these issues may have lower coupons. Your age, assets, and simply your personal risk tolerance factor into how one invests.
So investors are hopefully maintaining some level of cash (or near cash) so that if we reach a period of fear they can stand ready to buy some bargains. Over the long term buying some bargains when they appear can add substantially to your income stream.