Part 4 – Handling Our Portfolio

Hi everybody, I’m Marc Lichtenfeld, the editor of Oxford Bond Advantage. Welcome to the fourth part of my bond tutorial series.

Let’s start with risk tolerance.

Federal law prohibits me from giving personal advice. And figuring out your risk tolerance is about as personal as it gets. But here’s what I can do for you to help you navigate this crucial element of investing.

Let’s look at the worst-case bond scenario from 2015 and early 2016, when certain parts of the market got slammed. Prices dropped 20% to 80%. Energy, miners, steel… they all fell hard.

We had about 60 open positions in our portfolio when the commodity markets started to gyrate, and many of our B rated bonds were jolted. Yet with only three exceptions, they kept paying their interest due and returning their principals just as promised. Most importantly, the other 57 recovered and ran back up in price. Some have even doubled from their bottoms.

So the question you have to ask yourself before you buy any of the bonds rated BB- or lower is this: Can you put up with that kind of volatility? Can you watch your positions drop 60% or 80% and still trust me when I tell you to hold your bonds and not panic-sell?

Most people can’t. There’s no judgment in that, but it’s important to know yourself. We’ve had some volatility in lower-rated bonds, so you should know whether you can handle price swings before buying bonds rated BB- or lower.

Nonetheless, keep the concept of small positions in mind. If you never put more in the highfliers (the BB- and lower-rated bonds) than you can afford to lose, you’ll be fine.

So take some time to look at your past behavior to see what you’ve done in the stock market when prices have dropped. Did you sit tight and hold, or did you cut and run?

If the latter describes you, stick with bonds that are rated higher than BB-. You’ll earn a little less, but you’ll sleep better at night. And by limiting your panic-selling – which holding the less-risky bonds should help with – you’ll probably make more money in the long run.

Now, with that said, almost no one can buy all the recommendations I put out. This system was never designed for you to do that anyway. Maybe you can own all 55 or 60 open positions if you’re managing millions (which some of you may be). But most can’t.

So be selective. Stick to the ones you understand and the ones that feel right… and always stay within your risk tolerance.

If you’re not sure, that’s your answer. Do nothing.

Don’t buy just the highest yields. That’s a formula for disaster. Diversify over ratings, industries and companies.

I can’t stress that enough.

Next up, the portfolio is listed in every alert and is divided into two groups: Conservative and High Yield. Each group is then divided again into “Buys” and “Holds.”

Bonds are rated “Hold” for a reason. Stick to the “Buys” that fit.

Lastly, I recommend you use a full-service broker to help you transition into bonds. You’ll have someone watching your back and checking your decisions. They can also help you stay in your bonds when prices fluctuate, which is vital. They can also help you buy bonds that the discount brokers might not be willing to.

Some brokers, especially discount brokers, will sell you only bonds that they have in their inventory. If you want a bond they don’t have, they have to go out and find it. And that takes work. The fixed income desk at discount brokers often don’t want to work hard for their clients.

Full-service brokers usually will do what it takes to find the bond you want if they don’t have it.

This is new stuff for just about everyone, so take your time. The ball is now in your court, but here are some reminders before you start driving toward the net:

• If you insist on using an online broker, call and ask for the corporate bond desk to place your orders if you’re having trouble.
• If you have just a small amount of money to work with, own only the highest-rated bonds.
• Call one of the three brokers listed if you need help, or email me at editor@oxfordbondadvantage.com. I will answer each one as long as it’s not asking for personal investment advice.
• Keep your positions small. You have to figure out what “small” is for you.
• Own as many bonds as you can manage.
• Stay diversified over ratings, industries and companies, spreading any risk as thin as you can. And never get overloaded in one position.
• You want a minimum of one bond maturing per year out to five years.
• Figure out your risk tolerance.

Finally, let me know how you’re doing. Hearing from you helps me understand what I’m doing right and wrong.

I know I can’t cover every possible contingency. But I’ve hit all the high spots. And if you work with me, you will make money.

See you soon.