Marc Cuniberti
Although I have been in the markets for close to half a century, my wife on occasion worries about the inherent risk when it comes to owning stocks.
To appease the concern, I built a reduced-risk portfolio using what I have learned over the years.
Starting with plain old cash, I hold at least 6-9 months of our “burn rate” in savings and checking accounts which secure financing for our daily life should something happen to threaten our liquidity.
Next comes a basket of CDs. I ladder maturity dates which means buying 3, 6, 9 & 12-month issues and going out to about 3 years. I don’t go out further than that as I just don’t know what will happen in the grand scheme of things years out.
Treasury bills can have similar characteristics to Cds, being issued by the good faith and credit of the US government. Holding both CDs and treasuries just seems a bit more diversified than all CDs. Keep in mind, selling prior to the maturity date could result in a partial loss of principal. I won’t go into details here, just know if you buy a two-year CD, for example, and sell it early, you could take a haircut on the principal.
Next comes a smattering of corporate bonds of solid companies. I prefer large, well-known companies. Corporate bonds are debt that pay an interest rate and are generally regarded as less volatile compared to holding a stock. Here once again, I choose shorter durations that are similar to the durations listed above in my CD portfolio. I’ll also then add tax-free municipal bonds, which can be free from federal and state taxes if the correct type of bonds is chosen. Just make sure you have a crystal clear understanding of each holding’s tax implications.
Next are two types of annuities. The first is a “Fixed Indexed” annuity. This type of annuity may offer partial participation in stock market increases, but protects you against down market periods. Participation rates, fees, early withdrawal penalties, and terms and conditions vary with each annuity so make sure you understand all the mechanics of any annuity you are considering. Keep in mind that annuities are not US government guaranteed but instead are guaranteed by the underlying insurance company issuing them.
I then add what I call an “Income” annuity. This annuity offers you a certain percentage rate, depending on what age you decide to turn on the income period. In general, the longer you wait to turn on the income, the higher the percentage will be on the payments. The payments are for life fixed at that percentage rate. Holding both a growth and income annuity, since they operate differently, can be another step in my target of a wide diversification strategy with downside protection attributes.
Next on my list would be adding some real estate investment trusts, known as REITS. I use the publicly traded REITS which are listed in the common stock journals. REIT payments may be higher than some dividend-paying stocks which is why I consider them. Keep in mind that REITS can go up and down in price like a stock and payments are not guaranteed. I look for large REITS with good analyst reviews and strong financials. Because REITS make money from the rents received from properties they own, they may not be as susceptible to stock market movements as other securities may be.
Next, I’ll look at called “Aristocrat “dividend-paying stocks. Dividends are periodic payments to holders of the stock. Aristocrat stocks are companies that have increased their dividend payments to investors every year for at least 25 years, and some of them have track records of 30, 40, or 50 years or more of annually increasing payments. Think of dividend payment as a thank you from the company for owning their stock. Know that dividends can be cut, eliminated, or increased by the Board of Directors at any time. Although Aristocrat stocks have impressive track records, there are many great companies that also pay dividends, but have not made it onto the aristocrat list. As a general rule, the dividends from aristocrat stocks may be less than those that are not aristocratic stocks, as you may be paying for the aristocrat track record of annually increased payments.
Finally, not wanting to be completely out of the more volatile part of the stock market, I tend to add a few growth stocks of solid companies that I think may have a good chance of having their stock prices rise significantly over time. There is always a risk, but utilizing the above strategy may reduce risk over an all-stock portfolio.
In conclusion, since today’s market, in my opinion, seems to be more susceptible to volatility compared to what I have seen in previous decades, I tend to lean more into a portfolio of this type when it comes to my personal holdings.
“Watching the markets so you don’t have to”
(As mentioned please use the below disclaimer exactly) THANKS (Regulations)
This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, and California Insurance License #0L34249. His insurance agency is BAP INC. that can be contacted at (530)559-1214. Email: [email protected]
Sent from my iPhone. M Cuniberti
