From the Editor: We disregard conventional asset allocation models, because we make much more money by focusing our investments. All of the 100%-plus gains in the Money Map Report, for instance, are the result of "concentration," not "diversification." And today, it's time to abandon yet another classic money rule…
The "Rule of 100" is simple.
To determine the amount of money you should put into bonds and equities, just subtract your age from 100. The resulting sum is how much of your portfolio you should have allocated to equities. The rest is what you should have in bonds.
By that logic, if you were, say, 60 years old, then 40% of your money should be in equities, and 60% should be in bonds.
That's the "Rule of 100." And, unfortunately, it's worthless now, as you'll see.
That's why these unconventional shares are about to get white-hot…
You'll Get Plenty of Sleep, Too
We're living through a transition, an inevitable march toward rising interest rates – and falling bond prices. The "old rule" would have investors over-allocated in one of the worst-performing market segments at precisely the time when income is needed most.
Savings accounts, certificates of deposit (CDs), and other "safe" investments yield next to nothing, and income investors simply cannot afford to follow, uncritically, an unsophisticated, blanket investment rule like the "Rule of 100."
During the 1980s, as the explosion of self-funded retirement plans changed the investing landscape, the "Rule of 100" worked well. In fact, it worked for a generation or so, while short-term interest rates declined from about 14% in 1981 to effectively zero in 2013.
That march lower created the biggest bond price boom we've ever seen. But that boom is over. Now, the tables have been turned, and the old rules are no longer valid.
With short-term interest rates at zero, rates have nowhere to go but up. When interest rates go higher, bond prices fall. This means the value of your bond holdings will come under severe downward pressure in the years to come.
Less than two weeks ago, the mere hint of the Federal Reserve "tapering" its current $85 billion-per-month bond-buying scheme caused a sharp rise in long-term interest rates. With that came a sharp decline in the value of bond funds such as the iShares Barclays 20+ Year Treasury Bond (NYSE Arca: TLT), an exchange-traded fund pegged to the long-end of the Treasury bond market.
Since May, when the market began anticipating the Fed's taper move, TLT's share price has fallen nearly 14%. That's not a very good value, especially when you consider the sub-4% dividend yield you're getting to own this fund.
As investors, we need to be smarter now – and proactive – when making our investment allocations.The changing face of the bond market demands that our strategy change along with it.
In light of these changes that have already taken place, we cannot afford to "buy and hold" a long-term bond fund such as iShares Barclays 20+ Year Treasury Bond, while hoping for the kind of yield and share price appreciation that's delivered returns in the past.
No investor can afford to be a passive observer of their income holdings anymore. Now is the perfect time to embrace unconventional income assets, hybrid high-yield securities, and aggressive income-generating strategies.
I've included a number of opportunities below. But remember…
The first step is flushing old, outdated, outmoded "rules" down the drain. Once that's done, it's so much easier to begin the journey down the new road to permanent wealth.
Unconventional Income and Aggressive Growth Opportunities
Type of Security
Kinder Morgan Energy Partners L.P.
TeeKay LNG Partners L.P.
PowerShares S&P 500 BuyWrite Portfol ETF
(NYSE Arca: PBP)
Madison Covered Call Equity Strtgy Fd
Nuveen Equity Premium Opportunity Fund
BlackRockEnhanced Dividend Achievers Tr
Vornado Realty Trust
Robert Hsu is the editor of Permanent Wealth Investor and a former hedge fund portfolio manager at Wall Street powerhouse Goldman Sachs. He retired from Goldman at age 31. He since has come out of retirement to establish and preside over his money management firm, Absolute Return Capital Advisors. His retirement experience has given him his current mission: helping investors like you achieve their goal of comfortable retirement through profitable income strategies.