Bonds Are Like Cushions
Although the two bond ETFs that I sold today were a small fraction of our total investments, I gained a little more than $17,300 from selling my positions in SHYG and VCIT. One of these was in my brokerage account, and one was in my traditional IRA. The cash will sit unused until I determine a better way to put it to work. Bonds, even when times are good, are just a cushion.
Cushions are for comfort, but they don’t really perform any meaningful work. They just sit on the sofa waiting as decorations or perhaps to help me take a nap. Cindie and I still own one bond ETF. However, I sold some covered calls on that ETF and I believe they will sell to free up more cash.
Interest Rates Are Rising
When interest rates rise, some investment assets lose value. I believe the Fed will be forced to continue to raise interest rates. As a result, the value of bonds will decline. The reason is pure math and human nature. As interest rates rise, the appeal of bonds decreases for most investors. Bonds rarely grow in value unless interest rates are falling.
Practicing What I Believe and Preach
One of the first things I do when I review a brokerage or retirement statement for a friend, is look at the percentage of their funds devoted to bonds. In general, if they have less than 10% allocated to cash and bonds, I am not concerned. However, if the friend is relatively young and will be working for many years, bonds and bond funds are not the best long-term investment vehicle. They need to think of their investments as a kitchen remodel. The old stuff needs to be torn out and new needs to be built in. This can increase the value of the home. When we looked at homes before moving to Fitchburg, my wife always looked at the kitchen. The kitchen is where work is done and where people gather.
Although our bond holdings are far less than 10% of our total allocation, I just can’t justify having money tied up in something that has the potential to decrease in value. It is counter to everything I teach and encourage others to do. Furthermore, bond funds are notoriously bad at dividend growth. That means bonds are a poor offense against inflation.
What Have I Been Buying?
In the last year I have become a bit reticent to share what I am buying. It isn’t because I think I am buying bad investments. However, over time I have noticed that my friends tend to buy the same investments I buy. They trust my advice so they think “if Wayne bought it the investment must be good.” A little warning or caution is needed. Bear in mind that I may be buying an investment as an opportunity to make a short-term profit and/or to sell covered calls. Furthermore, my purchase of 100 shares of the XYZ company is far less than 0.20% of our total dollars. Another investor might have to use 5.0% of their assets to get even 50 shares. So, with that as background, let me share one company I have been buying.
When I start buying a position, I rarely buy all of the shares I want in one transaction. Because AMZN shares are trading at over $3,300 per share, I started by buying one share of AMZN for my ROTH IRA on March 10. I also bought one share for my traditional IRA. Then, on March 23, 29, April 1, and April 4 I bought one share each day for my traditional IRA. The astute reader will see that I now have five shares of AMZN in one account and one in my ROTH.
However, some of you will be asking me, “Why did you buy AMZN? It doesn’t pay a dividend!” There are four primary reasons. 1) Hardly a week goes by that the Amazon delivery truck doesn’t stop at our home. Even more amazing, the Amazon truck is in our neighborhood every day and the USPS truck goes by our home every Sunday delivering Amazon packages. I think there is more growth potential for AMZN. 2) Amazon has declared a stock split. For every share I hold I will receive 20 shares. That does not make Amazon any more valuable, but it makes the stock price more attractive for more investors. More investors are tempted to pay $165 to buy ten shares of AMZN than to spend $3,300 to buy one share. Although there are no guarantees, a stock split can be good for the price of the shares. 3) Amazon stock does trade on the options market. However, in order to trade options, you need 100 shares for every options contract. Now that I own five shares, those will turn into 100. The 20-for-1 split will provide shareholder of record (at the close on May 27) with 19 additional shares for each one held on or about June 3. Trading is expected to begin split-adjusted on June 6. At that point I can trade covered call options on AMZN shares. 4) Amazon announced a $10 billion share repurchase program. Buybacks are usually good news if the company buys the shares at a reasonable price. This means that the outstanding shares are gaining a small extra portion of the earnings and profit potential of the business.
I might take the money I received for my bond funds and buy more Amazon shares in my traditional IRA. However, this is not meant to encourage you to do the same. Just because Wayne and everyone else jumps off of the bridge doesn’t mean you should do it too. My mom often reminded us that following the crowd can be a dangerous way to live.