Investment Journal

Back in early 2007 I wrote an article about the bond market that noted the lack of a “risk premium” for corporate bonds. The “base” rate for corporate bonds is what the US government pays for treasuries of equivalent duration – at the time I wrote that article corporate bonds with good credit were paying only 1% higher than treasuries and “junk” bonds only 4% higher than treasuries. The conclusion of my post was that it made no sense to take on all the known and unknown risks of these bonds for a paltry 1% incremental return (or 4% in the case of the riskiest assets).

Per this article in August 16, 2008’s WSJ titled “American Express Joins the Payees”:

“American Express Credit Corp. joined the growing list of highly rated financial institutions that are paying steep financing costs when they raise money in the bond market… the premium to compensate investors for perceived risk was 4.25 percentage points over treasury rates.”

These financial institutions are finally offering returns that might be worth considering, given their high risk (as Bear Stearns showed us all, and that Fannie Mae and Freddie Mac would have if the government would have allowed them to go under without their now-explicit guarantee).

Here is the kicker, though:

“From credit-card issuers to investment banks to commercial lenders, financial firms are looking to raise capital to offset potential losses.”

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In addition to blogging I have some other side projects. One of my side projects is the web site www.trustfundsforkids.com (I’m not really plugging anything because there are no advertisements on the site and it is a simple, single page site with down loadable schedules) which describes the process of setting up a trust fund and the performance of the three trust funds that I have set up (so far) for my nephews and nieces.

The three portfolios invest in stocks. Portfolio one has a market value of about $16,000, Portfolio two has a market value of about $8500, and Portfolio three has a market value of about $1500. The size of the portfolio is driven by how many years of contributions have been made (7, 4 and 1 respectively).

About half way down the page (or you can use this link and jump there) each of the three portfolios has a single page that summarizes the key information. I put these schedules together manually from a variety of sources and have refined it annually.

How to Organize Your Stock Portfolio

It is actually quite difficult to put together a simple, single page worksheet that tells you what you want to know about your portfolio. While investing firms are getting better and better each year in formatting information and adding new organizational layouts (and of course it is so much better to download forms rather than have reams of paper), they still don’t easily tell you what you want to know, which is why (for now) I am creating my own formats. Here is what is contained:

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A lot of people throw around terms and assumptions without questioning them deeply. One of the most common assumptions is that stocks beat bonds (and beat the heck out of cash) “over the long haul”.

The basis in fact for this assumption is the long term equity records in the USA, the UK and Canada. These markets, over the long haul, have provided returns beyond bonds and cash.

Why only these markets? Because the rest of the markets (Germany, Japan, China, etc…) had some sort of cataclysmic event (World War, hyperinflation, or takeover by non-capitalist regimes) that make comparisons “over the long haul” useless. Even in these markets it is hard to see how wealth could have been preserved; cash (currency) was debased and debts were reneged upon, so all bets were off.

One key element of the “returns beat bonds and cash” is the assumption that you stay the course through horrendous market periods, hold on to equities, and then ride the upward ticks. If you act as many people do and sell when the market gets difficult, you are apt to be out of the market when it shoots upwards. Some of these bear markets are very lengthy and you have to have nerves of steel to ride them out.

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