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While there is no doubt that that having plenty of cash is a good thing, when it comes to investing and having cash in your portfolio, it’s still quite controversial. The question about what could be considered “too much” cash in your portfolio is still one that’s debated hotly.

They heat under that debate was turned up even more recently when Intelligent Portfolios was launched by Charles Schwab. It’s an algorithm-based platform that automatically builds and automatically balances someone’s portfolio. What raised a lot of eyebrows was the treatment of cash that Intelligent Portfolios gave, allocating anywhere from 6 to 30% for cash based predominantly on the risk profile of the investor.

Charles Schwab responded to the criticism by saying that “There’s no right or wrong answer to how much cash an investor should hold as an investment, it is a strategic decision,” adding that “Is easy to question cash in the sixth year of a bull market and when the Federal Reserve is artificially suppressing interest rates, but we don’t invest based on the last six years. We invest based on what we expect the future may hold. Bull markets end an interest rates rise. When they do, a little cash will feel pretty good.”

One thing that both sides agree on is simply this; there isn’t a “one-size-fits-all” solution. Every investor has a different risk tolerance, different investment goals, a different investment horizon and different investing strategies. That being said, the advice below should help each individual investor to determine how much cash is best in their particular portfolio.

First is simply to keep household cash and portfolio cash separate. You should have a certain amount of cash in your portfolio and keep separate accounts in your bank and in an emergency fund. The fact is, experts agree that there isn’t a huge benefit to having a large amount of cash in your portfolio but, as far as household cash is concerned, having at least six month’s worth of living expenses in an emergency fund (and, even better, 12) is a good idea.

Once you determine that you have enough emergency savings, it’s time to figure out how much, and which proportion, of your investable assets you should keep in cash in your portfolio. Keep in mind that cash in your portfolio doesn’t produce any yield, which has led to the term “cash drag”.

The fact is, many experts believe that having too much cash holdings in your portfolio is simply a sign of either fear or emotional concern. They suggest that keeping your emotions in check is the best way to figure out how much cash you should have in your portfolio, and also to keep in mind that keeping up with inflation is hard to do with cash.

One last note is that keeping a lot of cash in your portfolio because you’re either afraid of the future or, even worse, trying to time the market, is a big mistake. The fact is, a look back at investing history will show you that timing the market is very difficult, both for amateurs and professionals.

The Basics of REITs

Today’s short blog is going to look at REITs, what they are and why they are considered an excellent investment and excellent addition to any portfolio.

The definition of a REIT is a security on any of the major stock exchanges that sells like a stock and invest directly in real estate through either properties or mortgages. REITs are highly liquid method to invest in real estate, they receive special tax considerations and, in most cases, offer high yields to investors.

There are a number of different types of REITs available, including Equity REITs that invest in and own properties. The name comes from the fact that they are responsible for the equity (value) of the real estate assets they hold. The majority revenues from REITs come from the rents on those properties.

A Mortgage REIT is when you have an investment in and ownership of property mortgages. These start when an REIT loans money to real estate owners for mortgages, or they purchase either existing mortgages or securities that are backed by mortgages. The interest that they earn on their mortgage loans is principally where the revenues are generated with a mortgage REIT.

Lastly there are Hybrid REITs. These combine the strategies of both Equity and Mortgage REITs because they invest in both mortgages and properties.

If you wish to invest in REITs there are a number of ways to do so. You can either purchase shares directly on open exchange or, if you wish to invest in a mutual fund, find one that specializes in public real estate.

Many REITs also come with dividend reinvestment plans or DRIPs, which is definitely an additional benefit. Some of the properties that REITs invest in are warehouses, hotels, office buildings, shopping malls and apartment buildings. You can also find some that specialize in a specific area, for example office buildings, or a specific area of either a state or country.

In short, if you wish to get into real estate as an investment, and have a liquid, dividend paying asset, REITs are an excellent choice.

In today’s blog would like to briefly look at Corporate Bonds and High Yield Bonds, what they are and the basics of investing with them. For anyone interested in investing in corporate bonds, this should be some good information to get you started. Enjoy.


What are Corporate Bonds exactly?

Corporate bonds, which are also known as simply corporates, are in effect a debt obligation that is issued by either a private or public corporation. You can think of them like an IOU issued by a company. In most cases corporate bonds are issued in either multiples of $1000 or $5000, and the funds that companies raise when they sell bonds to the public are used for a wide variety of different purposes. In most cases the funds are used to expand the business somehow, from building larger facilities to purchasing new equipment and so forth.

When an investor purchases a bond, they are basically lending money to the company or organization that issued the bond and, in return, that company or organization promises to pay that money back (the principle) on a specific date (the maturity date).

Until the maturity date arrives, the company will also pay the investor a specific rate of interest, and usually pay it semiannually. Two very important things to note when you consider investing in bonds is that;

1) Any interest that you receive from your corporate bonds is taxable.

2) Unlike investing in stocks, you do not have an ownership interest in the company or corporation when you purchase bonds.


High Yield Bonds

When it comes to issuing corporate bonds, there are a number of credit rating agencies that rate the companies and organizations who wish to do so. Those include Moody’s Investors Service, Standard & Poor’s Ratings Services and Fitch Ratings.

When these credit rating agencies rate companies and find them to be excellent, they qualify for what’s called an “investment-grade” rating. That’s a good thing because it means that the chance the company will default and not pay back the bondholders is very low.

On the other hand, if a company doesn’t qualify for an investment-grade rating (because they have a higher chance of default) these companies are forced to pay a higher interest rate in order to attract investors. The higher interest rate compensates investors for the fact that they are taking on more risk by purchasing their bonds.

You’ll find many organizations issuing high-yield bonds, even US corporations, banks and oftentimes foreign governments as well.

Be sure to come back soon as we’ll be featuring more information about Corporate Bonds in a future blog articles.

What are the Benefits of Investing in Bonds?

Today in the United States investors have a variety of choices in the bond market, including US government bonds, asset-backed securities bonds, high-grade corporate bonds, municipal bonds and also high-yield bonds. But what are the benefits of investing in bonds? In today’s blog we’ll take a look at exactly that. Enjoy.

First, an investor can enhance their current income with high-yield bonds. This is especially true when interest rates are on the decline. Astute investors will focus on the difference between the yields on, for example, high-yield bonds as well as the yields on US treasuries. This is called a “yield spread” and, during almost all of the 1980s and 1990s, the yield spread was between 300 and 400 basis points (i.e. 3% to 4%) for securities that had a comparable maturity. There is an increased risk however, so you need to be willing to accept the trade-off for higher yields.

Bonds give you capital appreciation potential. Things like upgrades, improved earnings reports, a company merges or gets acquired or they have positive product developments can reward the investor with an increase in their high-yield bond’s price.

Security is also an added benefit of investing in bonds. For example, if a company is liquidated, bondholders are more likely to get a payment than stockholders because they have priority in the capital structure of the company. In fact, even an investor who holds a low rated bond will get their share of company assets before both preferred and common stockholders. The reason is simple; during the bankruptcy distribution of corporate assets, holders of  “secured debt” and “unsecured senior debt” will have the highest claim on a corporate assets left over.

Diversification is one of the major tenets of investing and, with high-yield bonds, investors get what’s considered a separate asset class, one that has different characteristics from other securities. Investing in high-yield bonds allows investors to spread their assets across many different segments of the financial market, which reduces their “risk concentration”,  i.e. the amount of risk they take by putting too much of their money into one asset class in their portfolio.

Lastly, high-yield bonds usually have a very attractive “total return performance”, meaning they pay better dividends. This is especially true when the economy is booming and interest rates are either standing level or in decline. Total return performance includes any price changes that occur as well as the income an investor makes from reinvested interest.

As you can see, the benefits that investing in bonds gives an investor are various and, in most cases, potent. If you have any questions or need any advice about investing in bonds, or about personal finance in general, please let us know by leaving a comment or dropping us an email.

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