Investments That Keep on Giving
Build Your Investment Portfolio with a Firm Foundation
BY JOE BRISBEN
As the December holidays approach, two thoughts dominate my mind. One is the gift that keeps on giving, which I always consider this time of year. However, this thought has turned to the investor, and here is the incident that caused it.
Last summer, I spent some time in Alaska in the Denali National Forest near the base of Denali, also known as Mount McKinley, the highest peak in North America. At my age and in my physical condition, I have no desire to climb such a mountain.
Nevertheless and despite a fear of heights, I enjoy a vicarious experience as much as the next person, so I attended a lecture and slide presentation by a Swiss mountain climber who has moved to Alaska to be near Mount McKinley, his first love.
Mountain climbing in the presenter’s family extends back several generations. He showed a black-and-white photograph of his grandfather in a Tyrolean hat, a short-sleeved white shirt, sleeveless sweater, knickerbockers, argyle socks, and heavy leather shoes with spikes. A thick hemp rope was wrapped around his waist.
The lecturer then showed a color photograph of himself in his gear: a red Lycra suit, an oxygen mask, and insulated shoes with spikes. He was carrying a huge backpack that contained an oxygen tank. In his hands was a coil of light but strong nylon rope.
“Safety in mountain climbing,” he said, “depends on the quality of your equipment and the trust you have in your friends.” Then he asked, “How many of you think mountain climbing is dangerous?” Every attendee raised a hand.
He declared: “Mountain climbing is actually safer than most professions.” Then he looked at me and asked, “What do you do for a living?”
“Oh,” I replied, “I’m just a simple, country stockbroker.”
“A stockbroker, eh?” he exclaimed. “Now, that’s dangerous!”
Later, I thought, Well, I suppose stocks and bonds look that way on the surface, but they don’t have to be that way.
Building an investment portfolio is like constructing a house. A homeowner wants to have a firm foundation, and that’s where bonds come in.
Bonds are a promise to pay an owner a certain rate of yield for a definite period of time. Investors with low risk levels will want insured certificates of deposit, U.S. government debt (treasury bills, notes, and bonds), or such U.S. government agency debt issued by the Government National Mortgage Association (GNMA or “Ginny Mae” for short), the Federal Home Loan Mortgage Corporation (FHLMC or “Freddie Mac”), the Federal National Mortgage Association (FNMA or “Fannie Mae”), the Federal Home Bank (FHLB), etc.
Investors in the higher tax brackets may want to consider municipal bonds, the yields of which are free from federal taxes—and sometimes state taxes.
Investors who don’t care about tax savings may want to consider corporate bonds. All bonds and their issuers are rated by such agencies as Moody’s or Standard & Poor’s. The ratings range from AAA on down.
The problem with bonds is that they tend to be hurt over time by inflation. For example, a $10,000 bond in an environment with 3 percent inflation in real dollars is only worth $9,700 after a year.
In theory, stock overcomes the problem of inflation—if the price rises. An investor interested primarily in growth may want only stocks with rising earnings. In housing terms, they may wind up with a five-story mansion that has more gewgaws than the Trump Tower.
In contrast, an investor with an eye toward value who wants a steady stream of income from stocks that look as though they could appreciate in price over time will want to concentrate on issues with dividends.
American stocks usually pay dividends every 90 days, and this is where the gift keeps on giving, provided the company has the earnings to support it. Once again, trust the rating agencies. Chances are the dividend will rise occasionally.
Moreover, when the market goes sour, as it has for three of the last four years, that dividend acts like a floatation device and keeps the stock’s price high compared with stocks with low or no dividend.
Utilities, real estate investment trusts, energy companies, and banks and other financial institutions are examples of companies with stocks that usually offer sizeable dividends.
So, investing can be relatively safe, depending on what stocks and bonds you choose and the advice you receive from your friendly neighborhood investment advisor. Happy holidays, and consider enjoying some investments that give and keep on giving.
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