Dear Mr. Berko:
My money manager has $440,000 of my $720,000 portfolio in triple-A-rated long-term bonds, and I’m scared to death what will happen if interest rates rise. My money manager has me in bonds for principle protection, but I don’t need all that income. I would appreciate your recommendations if you think I should make changes. I’m also worried about how Congress is managing our country. I don’t expect you to have a solution, but it certainly would be comforting if Congress earned the trust that the voters placed in them to put our country back on the right path of solvency. Your comments on the economy and Congress help me see this very clearly.
R.D., Vancouver, Wash.
Dear R.D.:
There are only three people in the world that know when the Fed will raise interest rates: Ben Bernanke, Barack Obama and Lloyd Blankfein of Goldman Sachs. Bernanke and Obama are forbidden to release this information till Goldman Sachs has had an opportunity to hedge its bond position and its clients have time to dump their low-yield mega-billion-dollar bond portfolio on the market before it crashes. So I strongly suggest that you lighten your load now. Don’t wait unit the Fed gives a signal at which time there may be a melee toward the exits and a large cadre of investors could get bludgeoned.
Your first change is to fire that brain-dead blithering idiot who manages your account. The problem with most money managers is that few are smart enough to think independently. Rather than anticipating a problem, they wait till it explodes, then they try to patch the damage. Sound familiar to many of you?
Please find a competent professional. He will recommend that you shorten the maturity dates on your bond portfolio. The maturity date reflects how sensitive your bond portfolio’s market value is to an increase or decrease in interest rates.
If your bonds have an average 10-year maturity value, then a 1 percent increase in interest rates may cause the value of your bond portfolio to fall by about 8 percent. And if your bond portfolio has a five-year average maturity, and interest rates rise by 1 percent, then the portfolio value might fall by about 5 percent. These numbers are not exact, but close enough to be chilling.
So, sell all your long-term bonds and shorten your maturities. A professional money manager I know recommends you shift the process into floating rate bank funds. These are one-month to six-month adjustable-rate bank loans made to large corporations. As interest rates rise, the loans reset, and your interest income increases, too. He suggests to focus on credit-worthy businesses whose debt is not lower than BB and recommends the following: (1) pioneer Floating Rate – FLARX at 4.89 percent (2) MainStay Floating Rate – MXFAX at 3.34 percent (3) Franklin Floating Rate – FAFRX at 3.34 percent and (4) Fidelity Floating Rate – FFRHX at 2.96 percent. He would want you to invest $110,000 in each of the four funds.
But I do have a solution. We can fix the country. If we put Congress in charge of the Mojave Desert, the desert would run out of sand in three years. And if Congress were running Walmart (WMT – $52), WMT would be bankrupt in two. Americans believe their representatives are corrupt and will milk the system as long as they are in office. Americans are beginning to realize that corruption is a sacrament for most members of Congress.
But what if Walmart were running the country? The WMT folks would fix Medicare/Medicaid because they know how. The WMT folks would make Social Security solvent because they know how. The WMT folks would eliminate the deficit and reduce the debt because they know how. The WMT folks would reduce taxes, repair our educational system and lower our health care costs because they know how. The WMT people would eliminate wasteful spending, mend and amend bridges, roads and airports because they know how. And if WMT were running this country instead of Congress, most Americans could be confident of their future once again. Vote WMT for Congress.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate Web site at www.creators.com.
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