Q. What're the risks with NLY? It has 11% yield!
A. Mortgage REITs have had a good run lately. For a brief introduction of mortgage REITs, see our previous discussion here. Despite the high yields of mortgage REITs, they have plenty of risks, it's mainly driven by Mortgage REITs' highly leveraged business model: borrow short-term and buy long-term mortgage-backed securities (MBS). When interest rates rise, mortgage REITs' borrowing costs will increase, but the value of their holdings will decrease. When interest rates drop, more mortgages will be prepaid, which leads to the drop of the value of holdings. If you are tempted by mortgage REITs' high yields and are okay with the risks, here are few good candidates:
Q. Should I hold bond funds as my portfolio at this time?
A. If you believe in Burton Malkiel, the author of the classic "A Random Walk Down Wall Street", who just published the latest edition of this classic book published 43 years ago, you might not want to do. In fact, Mr. Malkiel had 3 new ideas in his latest edition of the book: 1. Substitute bond funds with companies with a history of raising dividends. While stocks are riskier than bonds, but in today's low rate environment, for example, 10-year Treasury yield only at 1.7%, barely beats inflation at 1.6%. If inflation rises to 2%, the Fed will raise the interest rates, which will further hurt bonds as bonds' prices and interest rates move in opposite directions. 2. Be cautious of target-date funds As people near their retirement age of 65, the target-date funds will swap stocks to bonds, which as described in 1. above, investors will suffer; furthermore, today's retirees at age 65 have a long life horizon, as long as 30 years, holding a large portion of bonds in the retirement portfolio is way too conservative. 3. Avoid smart-beta funds Smart-beta funds, as we have introduced here and here before, are hot today. However, Malkiel has a chapter in his book dedicated to this topic and concludes that smart-beta promises higher return simply because they take on higher risks! Maybe it's time for you to grab Burton Malkiel's latest book - A Random Walk Down Wall Street: a time tested strategy for successful investing at Amazon, only $10. _ Q. If I delay claiming my social security benefits, will the benefits amount increase by month or by year?
A. If you delay claiming your social security benefits, you do not have to wait for 12 months to see the benefits increase. It increases by month. For detailed figures, see the official Social Security website. Q. When does my rental property fit in my retirement portfolio?
A. When people talk about retirement portfolio, they typically refer to stocks and bonds and the allocation between them. If you also own rental properties, you could treat your rental property holdings as stocks (in other words, put the value of your rental properties into the value of stocks category when calculating your portfolio allocations). The reason is you could treat a rental property just like a stock that pays dividends. Like a stock, your property's value could be up or down, and your rental income might be interrupted due to issues with your tenants, just like a stock if its underlying business falters, all these uncertainties make the renal property more like a stock then bonds. Furthermore, a rental property's poor liquidity makes it worse than stocks. |
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