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.
At age 65 now, I started SS last year and I get a nominal NASA pension (Was a GS-15 engineer and spent 23 years there). Before NASA, I was high-level management in the telecom industry. As such, I paid max into SS for more than 25 years. So, my SS, even when initiating at age 64 is near the max of waht people can hope to get – my pension is a tad higher so I can easily live off the two.
My investments bring in about equal to the SS/pension combined of which I will draw off a max of one-half that from taxable accounts till I hit age 73 (at least, that’s the plan). These are my SWAN accounts and are the bread and butter of my personal portfolios – I use no more than half of my income and the other half (hopefully) keeps ahead of inflation. I don’t plan to ever touch the principle.
I also keep a small trading account ($75K) where I trade options (mostly selling premium) and it has been very profitable for years (only two small red years in the last 20). I know, most traders lose money! But, for some reason, with my rule set and style, I have been very successful since 1984 when I started. Maybe, being an EE with a foundation in probabilities and stochastic processes helps, throw in a little luck now and again, and it has worked over the years. [One notable exception to my success, was back in 1999 when I built a 20K account up to $77K by short internet stocks – I was heavy short and a squeeze occurred wiping out that $77K in about an hour! Lesson learned and entered into my rule set for trading. FWIW – that short would have been successful not a week later but my account was drained due to a margin call. My wife at the time was not happy as that was about half of my liquid assets at the time!]
That trading account generates a nominal anywhere from $1000 to $2000/month and I use that for “play money”. If I don’t make money one month, no “playing” that month! Every week, I draw out whatever excess there is over $75K – if I were to have a red week, there is now outflow till I get back above that threshold. If I were to somehow lose all $75K, it would not materially affect my operating finances.
Yazz, starting early on options helps as well losing when you’re learning.
Yazzer you make a Finacial Advisor’s job easy peasy…Luv your plan & execution! GLTU!
Tim what about fixed to floating rate preferreds that are currently floating? I’ve only been involved in fixed income for a bit less than a year so I haven’t had the opportunity to see how issues behave over different environments. It seems to me that the currently floating rate issues have a zero duration and are callable right now so wouldn’t that help to mitigate any downward price movement? The floating interest rate of course will change and perhaps make it a challenge to secure 6 or 7%. But it seems like there are many issues out there with a floating coupon 7%+ right now. Appreciate everyone’s comments. Thanks!
Overall a safe 6.2% would do just fine. What I am not trying to do also important within my fixed portion of portfolio. I am not trying to trade volatile issues with hope of cap. gains. If want volatility and significant cap gains then long term equity indexing. I am not trying to guess the next leg up or down with preferreds. If I lose for a bit some opportunity cost, e.g. better buys at the moment, not a big deal. For me fixed, e.g. preferreds and baby bonds, just for obtaining safe income without significant risk of the principal wasting away over time. That is it. May limit choices but still enough.
“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.”
Obviously, that’s the $64,000 question. Where will rates be at the end of the year? If we knew that, we all could get rich!!!
The worst of all worlds is stagflation. I think this is a real possibility. Not like the stagflation of the late ’70’s and early ’80’s, but a paler version of it. Especially if a tax cut is rammed through Congress and no significant cuts are made to the budget. With defense, interest payments and social benefits basically untouchable, no significant cuts are there to be made.
Consequently, I can’t see interest rates moving significantly lower unless we experience a bad recession, which nobody wants. JM2C
The problem Whidbey is the government continues to make tax cuts instead of increasing taxes to cover the shortfall. I believe at one time it was called Reaganomics. Like what Private said a year ago with creative accounting you can make the books look however you want, but cutting taxes and cutting spending doesn’t really cancel out the long term debt America has built up. Actually more like going from a 30yr mortgage to a 50yr.
You increase the life of the loan to lower the payments but you kick the can farther down the road.
On one of our visits to Germany I was told they have 50 yr. mortgages there.
Calif has had budget surplus several times but our legislature always finds long term programs to spend one time surplus income on, then they wonder when the money runs out how they are going to fund the these programs. The one person who I didn’t trust governor Moonbeam surprised me when he created a rainy day fund for emergencies.
Ireland issued 100 year bonds! You do what you have to do to stay above water. Alas, unlike us, Ireland also eliminated their budget deficit and are reducing their national debt along with creating rainy day funds. If they can do it, we can, I think, well, I hope; then maybe not.
Was it necessary to call Governor Brown “moonbeam”? It was a pejorative back then and still is.
I apologize Will.
You are right. I was really surprised with what Jerry Brown did in his last tenure before he retired.
I knew nothing about how government could affect me when I was a teenager and I was the first generation of 18 yr olds to be allowed to vote. I knew it was important but I didn’t realize how important it could be.
When I did realize it I made it a point to vote and I don’t think I have ever missed going to vote even if I knew what I was voting on wasn’t going to win, especially if my wife voted and our votes cancelled each other out!
Appreciate your reply, Charles.
Jerry Brown was a good guy. A bit of a temper and ego (what politician hasn’t the latter. I ask?), but as a governor and mayor he did a lot for CA; and with good intentions, which matters. This is true of most politicians and people, regardless of whether we are correct. We need to be nicer to each other, at least in the public square. Vent in private, if it is cathartic.
Right Whidbey—the $64,000 question. So what it all comes down to who is the best interest rate guesser.
— There is some talk of revaluing the gold in Ft Knox from ~42 to market price ~2900. Beyond my accounting skills, but the effect would be to put a giant asset on the government books that could allow more debt issuance. (FWIW , there is a lot of interest in gold from nervous investors and central banks whose sovereign wealth is sitting in vaults in New York and London.)
— I don’t think interest on the government debt or Social Security are untouchable. Both appeared in the controversial OMB list of ~2600 programs under review to be cut. That list was retracted, but no explanation was offered. There is chatter about Soc Sec. There has been speculation about stretching out Treasury debt payments. I tend to think that an “amend and extend” would increase interest in hard assets.
In any event, all the recent uncertainty caused me to add some alt assets, hedges and gold instead of shopping for preferreds. JMO. DYODD.
Gold has an average return of 9% Euro or 7% USD from 2010 till 2025.
https://goldprice.org/
Maybe we are in the wrong business…
Adding some gold looks prudent
Gold is money, everything else is credit – JP Morgan
bear,
some talk also of US issuing 100 year, zero coupon bonds that buyers would swap out for their current bonds. part of the discussion of the mar a lago accord. would probably require some real arm twisting, but current administration doesn’t seem to be shy about that.
Not sure how realistic it is, but it is being discussed increasingly – for example
https://www.morningstar.com/news/marketwatch/20250302182/wall-street-cant-stop-talking-about-the-mar-a-lago-accord-heres-how-the-currency-deal-would-work