Great Lakes Secured Investments Blog » Treaury Bonds

UPDATE: ACHIEVING HIGHER YIELDS WITHOUT EXCESSIVE RISK

Randy Michael — Sun, 17 Jan 2010 16:31:49 +0000

Do you wish there was a coast guard rescuing you from the financial storm?

As we know, the modern-day Fed has reduced interest rates to record lows and has made it clear it has no intention of raising them anytime soon. To many, low interest rates sounds like a good thing and, like cash-for-clunkers or subprime mortgages, the practice certainly has the ability to create short-term stimulus. But the side effects include a declining US dollar, new asset bubbles that must eventually burst, and basically a misallocation of economic resources.

Those things are all concerns for the economy as a whole, but certainly the most “unfair” aspect of the artificially low interest rates is that it punishes savers. By cutting the federal funds rate to a range of zero percent to 0.25 percent, you earn almost nothing on these safe, cash-like investments such as short-term Treasuries, short-term CDs, and money market accounts into the gutter. The price a saver pays for protection of principal is pretty high these days. And yet nobody can disagree that if the American consumer could finally start saving money after decades of over-consumption and excessive credit, much stability could be restored to our currently tenuous economy.

Well, long-term Treasuries are not a very safe bet because the value and safety of those depends heavily on the strength of the nation’s balance sheet. With more than $12 trillion in debt and climbing, I think we can assume the global marketplace for long-term treasuries will continue to respond negatively. And even longer-term U.S. debt, such as corporate and junk bonds, are over priced.

So what type of investments can provide income or growth these days without risking too much of your principal?

Utilities. This includes natural gas providers, electric companies, and telecommunications companies. Now, it’s not like the old days where utilities could be counted on for steady dividends and low volatility, the favored investment of little old ladies. Clearly utilities aren’t recession proof, as we’ve seen with energy and telecommunications stocks. But the swings are typically much less severe than what you see in housing, technology, or manufacturing. And even during the worst downturns, those core businesses still tend to produce cash just because of the nature of the product and transaction.

Many utilities yield at least 5 percent or 6 percent. That’s better than you can get with Treasuries. Besides, the volatility can work in your favor as well. Buy the right stock at the right time and you can earn capital gains along with your yield.

Non-U.S. Fixed Income. You probably shouldn’t keep all your fixed income money in the U.S. The dollar has been falling virtually nonstop for months now. That hurts foreign owners of our debt. But the process works in your favor if you are an U.S.-based investor.

Consider buying foreign, fixed income securities, and as the dollar falls, the dollar value of your holdings will rise. Any principal and interest payments you receive in the foreign currency translate back into more dollars.

Speculating on currency alone is not for the faint of heart, but that’s not what I’m talking about here. Beyond just the currency impact, foreign yields will likely be substantially better than those offered here in the U.S. Bottom line: You can earn higher yields AND get a currency “kicker” by investing in foreign, fixed income securities. Foreign dividend-paying stocks are another alternative. Many yield much more than their U.S. counterparts.

Energy. Recently, the prices of most kinds of energy products– crude oil, gasoline, heating oil, and natural gas—have risen dramatically. But the business of exploring for, producing, and trading energy is relatively high risk. That translates to losses.

However, history shows that even during recessions energy use, regardless of cost, does not stop. So there is always a need to store and transport gas, oil, and other petroleum-based products.

Consider investing in a Master Limited Partnerships (a.k.a., MLP). Since they own many of the storage and distribution networks that energy companies use to get their products to market, they make money whether energy prices rise or fall.

EARNING HIGHER INCOME IN A LOW YIELD MARKET

Randy Michael — Fri, 20 Nov 2009 15:20:57 +0000

Unless you are a full-time investor—i.e., you don’t rely on a job for your primary income—then your goal is likely to achieve steady income while lowering your risk. But in today’s market, that’s easier said than done.

For one thing, interest rates on bank CDs, money market funds, and even short-term Treasury securities are locked at abnormally low yields.

For example, one-year jumbo CD rates, are just 1.6% while many money market funds pay less than 1%, making life quite difficult for fixed-income investors right now. Other potential threats include soaring federal budget deficits and the chronically weak U.S. dollar.

The once almighty buck continues to lose value against global currencies … DOWN another 14% in the nine months ended September … and if the slide continues at this pace, it could easily lead to higher inflation down the road and potential lost value in EVERY dollar-denominated asset you own.

What options are available for fixed-income investors to deal with these challenges? Here are a few:

Earn higher current yields from a broad mix of income-producing investments. Consider diversifying into a wider range of income producing securities such as corporate bonds or income securities with longer maturities.
Capture gains from shifts in global interest rates. The low rates on safe, income-producing securities that we see in other countries is not necessarily as extreme as what we see in the USA, especially with government backed securities. For example, I was earning a fixed, secured 7.85% on a CD in Australia. And usually these securities can be purchased without having to travel to that country (I purchased mine on the Australian bank’s website).
Provide a hedge against the falling dollar with international fixed income diversification. So, for example, even if you had owned British fixed income securities that were paying the same crummy, low rates that US securities are paying, you would potentially have made an additional 10 percentage points in gains just by fluctuations in the British pound against the dollar!
Seek out “private” offers to invest / lend money for a business. In this cash strapped economy where bank financing is tight, there is no end to the opportunities you have to invest your cash in a new business venture where someone else is running the business, and you’re just the bank. As a side note, even though we generally feel more comfortable lending money to a friend / family member, try to be objective. You may trust they’re intentions are good, but is this really a good business and are they really the right person to manage it. Recently, for example, a friend of mine lent $250,000 to another private individual (that he had no prior relationship with) to start a McDonald’s franchise. Now, since the guy had long been in the fast-food business and he’s choosing McDonald’s (who has a track record, to say the least) rather than, say, Joe’s Hamburgers, I’d say my friend’s investment is safe.
Seek out “private” offers to invest / lend money for cash-flowing real estate (office buildings, apartment buildings, long-term rental houses, NOT flipping!). This is certainly my preferred strategy but it always comes with the same warning: make sure the cash flow of the property is adequate to make a payment to you every month. Yes, we want to check the creditworthiness, financial condition, and experience level of the real estate investor you’re partnering with, but we are more interested in the investment itself and whether it is self-funding. No matter how well intentioned he/she is, we want to know that our payments will be coming from the profit of the property, not from the individual’s job income or life savings.

Not for the faint of heart, please don’t go this last one alone. Certainly Great Lakes Secured Investments LLC can provide you with up to five times the income of other fixed, secured investments collateralized by a property whose cash flow easily covers the payment due you every month.

“EQUITY INDEX” ANNUITIES

Randy Michael — Mon, 19 Oct 2009 21:01:32 +0000

With most fixed income investments, there is a high price to be paid for the “security” of fixed income in an investment. Government issued bonds, for example, carry a perception of security—albeit not altogether true—and the price to be paid is low or even negative returns on your investment.

Although a relative newcomer on to the scene of investment products, it would appear that equity index annuities also fit into that category: perceived security, yet very low returns and a requirement to tie up capital for long periods of time in order to achieve anything positive in returns.

Equity indexed annuities are insurance products. Their returns are tied to the performance of stock indexes such as the S&P 500 stock index. The advantage is touted to be that, regardless of the performance of the index, the principal balance of their investment will not decline. It is said that if the stock market performs well, the investor shares in some of the gain. If it doesn’t, the investor doesn’t lose. Sounds like you get to have your cake and eat it, too.

But that protection comes at a price. First, there are surrender charges and other penalties if an investor withdraws early, so changing your mind is really not an option unless you want to lose money. And how to get MORE than a pittance of a return even when you do hold out for the long term? That presents a dilemma as well, since indexed annuities have pre-set caps that limit their gains. If, for example, you believe the stock market will provide 10% returns, the investor in an index annuity gives up much of those gains. On the other hand, if you believe the market will drop by 10%, you will be protected from the decline. So it’s really what happens over the long-haul that matters.

It’s obvious that many investors have taken the bait. In 2008 alone, more than $25 billion was plunged by investors into equity index annuities.

Insurance companies, of course, keep much of the gains when the market is up.

Much of the risk by the insurance companies, for example, is hedged by regularly-changing “participation rates”, which reference how much of the return the index provides can be kept by the investor. As you can imagine, the insurance company gets to change those limits from year to year, usually based on “market performance”.

In my opinion, the biggest negative to this type of investment is rooted in the fact that it is an insurance product. Like most insurance policies, just like in a casino, the rules are somewhat complicated and always changing in an effort to make sure the “house” wins over the long haul. Doesn’t mean there’s never a mutual benefit, but it probably means the benefit will be mutual only if the market does better than average.

And if you feel like you have a handle on whether a market will do better than average, why not just invest in that market, and give yourself the ability to opt in or out, instead of relinquish control of your funds long-term to an insurance company who gives you a “guarantee” you won’t lose in order to keep much of the gain?

MORE SIGNS OF UPCOMING DECLINES IN TREASURY AND SAVINGS BONDS

Randy Michael — Mon, 21 Sep 2009 10:55:53 +0000

How are you going to cultivate your finances in these economic times with the rapid destruction of the money balances?

When it comes to foreign creditors selling off their U.S. Treasuries, it seems like they’ll always buy our debt because our bond market is the most liquid, safest warehouse for their money. In the short-term, that’s probably true. But the longer-term trend is much different. Like irresponsible teenagers throwing a party and trashing the house while their parents are gone, the Fed and Washington politicians don’t want to tell their constituency the ugly truth: that the current government spending spree is not only mortgaging America’s future, but will destroy the financial foundations of this country.

But over time, they WILL gradually lower demand for U.S. debt, pushing bond prices lower, and interest rates higher.

Why are foreign creditors trying to avoid U.S. debt? First, the U.S. government has adopted an unofficial policy of U.S. dollar debasement or, at best, an official policy of not-so-benign neglect. Second, despite a U.S. federal deficit that’s at least three times larger than the worst in history, there’s no plan to bring it under control. Third, the U.S. Federal Reserve is monetizing the debt with printed money, a classic cause of rising gold, rising commodity prices, and a declining currency.

Concern is rising sharply in places like China. The country has more than $2 trillion in reserves. Perhaps as much as ¾ of that is in US dollars. If the dollar keeps declining, so too will the value of those Treasuries, corporate bonds, and equities. In fact, the former vice chairman of China’s Standing Committee warned that concern is rising, and rising fast.

China’s Ministry of Finance also said that it would sell $900 million worth of government bonds soon. This is the first issue of Chinese government debt targeted at global investors. The idea is to increase international confidence in China’s currency and China’s bond market.

Please don’t disregard this important long-term trend. It’s going to lead to higher interest rates, whether the Fed and Treasury like it or not. That sounds like a good thing if you own those securities, but it’s not…remember, when interest rates rise, the value of the underlying bonds decrease substantially.

For those of you with a long-term horizon in your retirement planning, make sure you understand that it is a near certainty that US savings bonds and Treasury bonds will drop dramatically in value.

At GLSI, we offer up to 10.0% fixed interest, secured by real estate whose cash flow is nearly double that. And when we say secured, we mean secured by a 1st position mortgage. You’re not second or third in line behind other lienholders. Contact us for a truly fixed and secured investment!

The Power of Your IRA to Become a Private Bank

Randy Michael — Wed, 09 Sep 2009 01:42:44 +0000

Most likely, if you’ve ever asked a bank, CPA, or financial planner if you can use your 401K or IRA money to invest in real estate, they’d say “no”. What they really mean is they don’t know, or that THEY sell stocks and bonds and CD’s, not real estate.

Though it has always been legal to invest in real estate through your IRA since it was created in 1974, the idea of re-directing your retirement funds into investments other than stocks, bonds, and mutual funds is still pretty novel to a lot of people. Well, it’s not too good to be true—it’s true.

One of an IRA’s greatest features is that it allows you to enjoy the true power of tax deferred compounding interest. Compound interest occurs when interest is earned on a principal sum along with any accumulated interest on that sum. In other words, you are earning interest not only on your original investment money, but also on the interest earned from the original money.

Compound interest can occur with any investment you make, but the true power of compounding interest is obtained when you make an investment in a tax-deferred environment, like an IRA.

With a tax-deferred IRA, you do not pay tax immediately on your earnings—for example, the sale of a property, rental income on a property. Thus, you are able to get the compounding power on ALL of your pprofits, not just what is left after taxes. And with the Roth Self-Directed IRA, after five years the money is tax-free for life!

When deciding upon the appropriate IRA to roll your current retirement account into, think about Traditional vs. Roth. In both plans, your investment profits grow tax-free, but the differences are when you receive the tax advantages to the principal investment and yearly contributions. With a Roth IRA you don’t receive a tax deduction on your yearly contributions, but when you take your money out of the account you don’t have to pay any taxes. A traditional IRA gives a tax deduction every year based on your contribution, but you will have to pay income tax when you take your money out of the account.

Can you earn tax-free profits investing in real estate and real estate notes? Yes, you can. Let Great Lakes Secured Investments show you how. Many investors are successfully investing in real estate and other alternative assets through their IRA and not paying taxes on the profits. Not paying taxes on profits means more money for your retirement.