Wanted to build off some concepts brought up in UNSCRIPTED ....
-"F*ck you" pot: cash you sit on so you can act on opportunities
-"Paycheck" pot: non-speculative cash earning you income at 5%
-Rent rule: demand rent on your capital, otherwise, don't speculate
-SNAP rule: be able to get your cash back with a snap of your finger.
-3 Years In 3 months Rule: If expected yield is 3%, and the stock price goes up 3x that rate (9%) in 3 months or less. Sell the stock and take your gains that would have otherwise taken 3 years to achieve.
ex./ stock A yields 3% and went from $100 a share to $109 per share within a 3 month period, you should sell.
Buyback guideline: 66% mean reversion. If the total change in stock price was $9...a 66% reversion to the mean would be $6.00 (66% of $9). You sell Stock A at $109 and sit on the cash. If Stock A then reverts $6.00 to $103, you may then wish to use that as a guideline to buy (rent out your capital) into the stock again.
I wanted to look at how these rules might work in a Bear market where prices are falling.
Interest rates are rising. This means that Bond prices fall in line with the average duration of the bond(s) held.
We've had two recent 0.25% rate increases (.5% total), Bond prices already priced in a full 1% rise (expected .25% in June and again in September), so a 10-year bond would have dropped 10% between September 2016 and March 2017.
It has been suggested that interest rates may climb an additional 2% (3% total) by the end of 2019. This means that while things are likely going to be stable through 2017, the same 10-year fund may see a principle drop of an additional 20% in the subsequent next 2 years (which is not yet priced in the market). If a yield on a 10-year bond is just at 3%, that's a lot of years to make if you already felt the 10% drop in principle and an additional 20% speculative drop that may be on the 2-3 year horizon.
Questions:
1.) All losses are unrealized until you actually sell, you can still receive the dividend you intended, and the price can still recover if interest rates swung back down....would an income investor just sit on those unrealized losses and take the "rental income" without worrying about taking some losses here and there? Or does the violate the SNAP rule since your principle would only be available to you at a loss?
Or would part of being the income investor say, well if I truly believe the culture has changed and higher interest rates are on the horizon....that I'll just sit on cash and wait until 2018-2019 to get back in?
Or do you sit on the loss...and just let the "F*ck you pot" fund any deals that may come up in 2018-2019.
2.) Can you reverse the "3 years in 3 months" rule (and 66% reversion to the mean guideline) to apply to minimizing losses?
For instance in the 3% yield example:
You buy stock A for $100 at expected yield of 3%, it drops 9% to $91. Would you then sell all shares to minimize further losses, and buy again if it dropped another $6 bucks to $85? (or raised another $6 to $97?)
Since income-investing is a newer concept to me. I just want to make sure I'm framing these decisions in the right way when it comes to an income-producing "paycheck pot" mentality.
1.) do you have a system to protect against losses (specifically rising interest rates and bonds)?
2.) do you just say "tough luck" and sit on the unrealized losses and take the income either way knowing that you can't pull that principle without realizing the loss? Re-invest with money from elsewhere ("F*ck you" pot/future invested dividends etc)
3.) Do you trust your research and sit on cash in these instances even though that decision is based on speculation and less on income?
-"F*ck you" pot: cash you sit on so you can act on opportunities
-"Paycheck" pot: non-speculative cash earning you income at 5%
-Rent rule: demand rent on your capital, otherwise, don't speculate
-SNAP rule: be able to get your cash back with a snap of your finger.
-3 Years In 3 months Rule: If expected yield is 3%, and the stock price goes up 3x that rate (9%) in 3 months or less. Sell the stock and take your gains that would have otherwise taken 3 years to achieve.
ex./ stock A yields 3% and went from $100 a share to $109 per share within a 3 month period, you should sell.
Buyback guideline: 66% mean reversion. If the total change in stock price was $9...a 66% reversion to the mean would be $6.00 (66% of $9). You sell Stock A at $109 and sit on the cash. If Stock A then reverts $6.00 to $103, you may then wish to use that as a guideline to buy (rent out your capital) into the stock again.
I wanted to look at how these rules might work in a Bear market where prices are falling.
Interest rates are rising. This means that Bond prices fall in line with the average duration of the bond(s) held.
We've had two recent 0.25% rate increases (.5% total), Bond prices already priced in a full 1% rise (expected .25% in June and again in September), so a 10-year bond would have dropped 10% between September 2016 and March 2017.
It has been suggested that interest rates may climb an additional 2% (3% total) by the end of 2019. This means that while things are likely going to be stable through 2017, the same 10-year fund may see a principle drop of an additional 20% in the subsequent next 2 years (which is not yet priced in the market). If a yield on a 10-year bond is just at 3%, that's a lot of years to make if you already felt the 10% drop in principle and an additional 20% speculative drop that may be on the 2-3 year horizon.
Questions:
1.) All losses are unrealized until you actually sell, you can still receive the dividend you intended, and the price can still recover if interest rates swung back down....would an income investor just sit on those unrealized losses and take the "rental income" without worrying about taking some losses here and there? Or does the violate the SNAP rule since your principle would only be available to you at a loss?
Or would part of being the income investor say, well if I truly believe the culture has changed and higher interest rates are on the horizon....that I'll just sit on cash and wait until 2018-2019 to get back in?
Or do you sit on the loss...and just let the "F*ck you pot" fund any deals that may come up in 2018-2019.
2.) Can you reverse the "3 years in 3 months" rule (and 66% reversion to the mean guideline) to apply to minimizing losses?
For instance in the 3% yield example:
You buy stock A for $100 at expected yield of 3%, it drops 9% to $91. Would you then sell all shares to minimize further losses, and buy again if it dropped another $6 bucks to $85? (or raised another $6 to $97?)
Since income-investing is a newer concept to me. I just want to make sure I'm framing these decisions in the right way when it comes to an income-producing "paycheck pot" mentality.
1.) do you have a system to protect against losses (specifically rising interest rates and bonds)?
2.) do you just say "tough luck" and sit on the unrealized losses and take the income either way knowing that you can't pull that principle without realizing the loss? Re-invest with money from elsewhere ("F*ck you" pot/future invested dividends etc)
3.) Do you trust your research and sit on cash in these instances even though that decision is based on speculation and less on income?
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