If you’re pleased that gold has surged $10 this morning and oil is pushing $70 per barrel …
If your portfolio is growing nicely with exchange-traded funds like GLD or an energy royalty trust like Enerplus, and …
If you’re making money hand over fist in small-cap natural resource companies …
That’s wonderful, and I couldn’t be more delighted. Congratulations on your success! And stick with it because a lot more could be on the way.
But please don’t lose sight of the big picture:
Making big money is no good unless you can keep it. And money itself is no good unless you can enjoy it in good health.
This morning, I’m going to tell you about some of the steps I’m taking to achieve these goals for myself and my family. If they make sense to you, follow my lead. If not, use your good judgment to develop your own plan.
My First Step:
Avoiding Risk
First and foremost, I’ve got an untouchable keep-safe fund as far away from risk as humanly possible.
This is the money I’ve reserved for health emergencies, long-term care or my grandchildren’s college tuition.
It’s money I’m not going to invest in options, small caps, tech stocks or blue chips. I won’t even put it in supposedly safe Treasury bonds.
In fact, right now, while gold is surging, Treasury bonds are taking a beating.
Moreover, the decline has now crossed a critical threshold marking the first major trend change since 1994.
This is telling me that the market value of bonds is headed sharply lower and their yield sharply higher.
It means that if I buy a Treasury bond today, and it continues falling in value, every penny of interest I’d earn this year could effectively be wiped out in a few short months.
That’s if bonds fall modestly. If they fall sharply, I could wind up with a market loss that’s double or even triple the yield. No thanks.
My Second Step:
Going for the
Safest Yield
The yield on Treasury notes and bonds has crossed above the 5% level. But it’s still not far from the lowest I’ve seen in my lifetime — another reason I’m not interested.
My goal is far higher: To lock in 8% … 10% … maybe even 12%. I figure that with a big enough nest-egg and without a racy lifestyle, the interest alone — guaranteed by the U.S. Treasury — could be enough to live on for the rest of my life.
Will I get that yield tomorrow? No. But I’ve been waiting patiently for higher yields for quite some time. So I can afford to wait a while longer.
And in the meantime, I can put my keep-safe money in 3-month Treasury bills or in a Treasury-only money market fund. (Click here for a list.) The advantages are many:
Advantage #1. Safety. As long as I wait the 13 weeks until my T-bills mature, the Treasury Department guarantees zero risk of loss. And even in the very rare event that I sell them on the secondary market at a loss, the loss would be so tiny I’d need a microscope to see it.
Is the U.S. Treasury really a good credit risk? Some people are so concerned about the government’s bulging debts and run-away deficits they’re beginning to wonder, and I don’t blame them. But it’s still the highest rated borrower on the planet. So until someone offers me a better alternative, that’s where my keep-safe money is staying.
Advantage #2. Rising yield. A couple of years ago, the yield on short-term Treasury bills was hovering so close to the zero line it felt like I was paying the government for the “privilege†of loaning it my money.
Plus, at that time, there was a big gap between the ultra-low yield on 3-month T-bills and the still-decent yield on 30-year Treasury bonds. But now T-bills yields have mostly caught up, and the gap has narrowed tremendously.
Every time the Fed hikes interest rates by a quarter point, the yield on my T-bills promptly rises by about a quarter point. And every time Wall Street trumpets “no more rate hikes coming,†the Fed sends not-so-subtle hints that it’s going to raise them some more.
That’s what happened after the last Fed meeting. And from everything I can see, that’s what’s going to continue happening after the next Fed meetings for as far as the eye can see. Good. My T-bill yield, although still not high enough to give me any thrills, just keeps moving up and up.
Advantage #3. Liquidity. With a Treasury-only money fund, I can get my money out so quickly it’s like having the cold cash in my night table when I wake up every morning.
I can write checks on the fund to immediately pay my bills. Or I can call the fund and have them wire the money to my local bank within 24 hours.
Advantage #4. One Account. Some people have bank accounts coming out of their ears. They’ve got checking accounts, savings accounts, money market accounts and various CDs under the $100,000 FDIC limit. I don’t. Except for a local checking account I use for small monthly bills, I have just one single, multi-purpose Treasury-only money market account that does it all.
It’s not FDIC insured. But that doesn’t bother me because the U.S. Treasury Department guarantees all the securities that the fund buys on my behalf.
Advantage #5. Exempt from local income taxes. On the surface, the yields on CDs and Treasuries are similar. But there’s a significant difference: The Treasuries and Treasury-only money funds are exempt from local and state income taxes. Bank CDs — and money funds invested in CDs — are not.
This isn’t an issue for us now because we live in Florida, and Florida has no state income taxes. But it certainly would have made a difference when we lived in New York. Ditto for states like California or Massachussets.
Advantage #6. Inflation protection. People ask: “Suppose inflation surges or the dollar falls in value? What good are your dollar-denominated Treasury bills going to do you then?â€
Answer: I get most of my protection from the rising yield: The higher inflation goes, the better my yield is going to get.
Will the higher yield always be enough to cover the loss in the dollar’s purchasing power? Probably not. But in any case, I can get the rest of my protection elsewhere. (More on this in a moment.)
My Third Step:
Going for Much
Higher Yield
This isn’t for my no-risk, keep-safe-no-matter-what money. But for some of my money, I’m willing to take, say, double the risk for the chance to make five or six times the total return.
I’m talking about Canadian royalty trusts, especially those specialized in energy.
One to seriously consider: Enerplus Resources (ERF). Its dividend yield is 8.36%. And at $51.90 per share where it closed on Friday, it’s selling at a discount from its recent all-time high of $56.05.
Like any stock, it can go up … and it can go down. But over the past three years, with oil and gas prices rising steadily, it has been going up pretty steadily, with, at worst, very modest corrections.
And in the months ahead, if energy prices continue higher, the company’s revenues are likely to rise in tandem. Overall, between dividends and stock price appreciation, you’re talking about total returns of 20%, 25%, 30% or more per year.
Like with bonds, you can lose money. But even assuming bonds don’t fall in price, the total return on Enerplus could be over five times more than what you can get with a 30-year Treasury right now.
My Fourth Step:
I Seek Added Inflation Protection
With Investments Most Likely
To Rise When the Dollar Falls
I’m talking about the same kind of investments I told you about at the outset: Those tied to energy, gold, silver, and other natural resources — the same ones that have been going up like a rocket month after month.
My original plan was to use them as a hedge against the falling dollar. I figured the more the dollar goes down, the more resources like gold and energy are likely to go up.
But it hasn’t quite panned out that way — it’s actually worked out better than expected.
Why? Because precious metals and energy have been taking off despite the fact that the dollar has been relatively stable.
This is a bad sign for anyone who’s locked up in long-term bonds or who’s not protected from inflation. It means the worst is yet to come.
But it’s a great sign for anyone who’s bought the contra-dollar investments. My reasoning:
If gold and energy are doing so well even without a dollar decline, imagine the kind of performance they could deliver when the dollar starts sinking!
What’s holding the dollar up? Essentially the same thing that’s holding up the naked emperor’s imaginary clothes: Blind faith!
From all over the world, investors have been pouring their excess dollars back into U.S. assets — not just Treasuries, but also stocks and real estate.
But all it will take is a few disappointments — such as falling U.S. bond prices or crashing U.S. real estate values — and those foreign investors could start pulling their money out.
I can’t say when. But I can say it could get ugly. And no one is going to ring any bells to warn you before the stampede begins. That should translate into:
- A bigger plunge in bonds, and …
- A bigger surge in virtually every natural resource on the planet, especially gold and oil.
To take advantage of the situation, here are some contra-dollar investments you may want to consider:
1. Precious metals exchange-traded funds.
The second phase of the gold bull market Larry has been talking about since last year is now under way. So it’s clearly too late to buy near the bottom. But that shouldn’t deter you from investing prudently on the next dip.
Years ago, it was a pain in the butt to buy gold. You had to buy bullion bars or coins. You had to pay storage costs and insurance. Plus, you had to tip-toe around dealers, not all of which were reputable.
No more. Now all you have to do is call your broker — or click on a mouse — to pick up shares in something like streetTRACKS Gold Reserve (GLD), the exchange-traded fund that’s based on gold.
Each share tracks the value of one-tenth of an ounce. So if gold is at $600 per ounce, GLD should be close to $60, minus expenses.
And soon, you should be able to do something similar with the new silver ETF.
2. Natural resource mutual funds.
For a long time, one of my favorites has been U.S. Global’s Global Resources Fund (PSPFX), and I’m not the only one with that opinion.
This year, PSPFX was named “Best Natural Resources Fund†at the Lipper Fund Awards USA ceremony in New York, the second consecutive year that the fund has won in the natural resources category. The award was given for the fund’s consistent performance over the three-year period ending Dec. 31, 2005, ranking it #1 out of 74 funds in its category.
Through last week, the fund returned 21.6% from the beginning of the year and 65.3% over the past three years. That’s over 49 percentage points better than the S&P.
So now do you see why, for the past three years, we’ve been telling you to stay away from most stocks and focus on these kinds of investments?
3. Mining shares. If you pick these correctly, they can give you much greater profit potential than bullion-type investments like GLD. For every dollar increase in the price of gold, for example, you could see gains of $1.50, $2.00 or even more in the price of these shares.
And if you go with small caps that are valued at just a fraction of their gold or mineral reserves, the potential is even greater. Right now, for example, Larry and Sean are looking at three that boggle the mind.
One’s an Australian gold miner involved in the exploration, development and production of gold exclusively in China, sitting on at least 4.48 million ounces. At $600 an ounce, those gold resources are worth $2.7 billion. But the company’s market cap is a mere $423 million.
The second is a soon-to-be-famous gold miner with gold in the ground of up to 8.7 million ounces, worth $5.22 billion at today’s gold price. Market cap: Just $287 million.
The third is also Australian — a miner set to start producing gold just a few months from now. It’s expected to produce over 500,000 ounces of gold per year for more than 20 years. Total potential gold resources: 12 million ounces of gold worth $7.2 billion. Market cap: Just $711 million.
Right now, what happens in the Iran crisis could have a big impact on gold. And a few days before the UN Security Counsel meets on April 28 to decide the fate of Iran, Sean will be recommending at least two of them in his Red-Hot Asian Tigers. (For more info, call 800-898-0819.)
My Fifth Step:
I Look for
Safe Insurance
My Uncle Sidney is over 90, but still very alert … and very worried. His concern: That his insurance company could die before he does.
Don’t laugh. It wasn’t that long ago that some of the largest, supposedly strongest, insurance companies went belly up, trapping over six million American policyholders. So if it happened before, he figures it could happen again, and he’s right.
In the past, whenever he’d call me for a Weiss rating, I’d look it up for him in our guide we sell to public libraries. But now all he has to do is go to our website, www.WeissWatchdog.com, and he or his son Steven can get whatever they want instantly. Plus they get email alerts whenever the Weiss ratings change.
Right now, most insurers have stronger balance sheets than they had in the 1990s. But if the real estate market crumbles and mortgages start going bad, that could change.
So I recommend strictly insurers with a Weiss rating of B+ or better, and there are plenty to choose from.
My Sixth Step:
Avoiding Health
Insurance Rip-Offs
My primary health strategy is living a healthy lifestyle, something I learned from my father at an early age. But I’m going to be 60 this year. So that alone isn’t going to cut it. I need a back-up plan.
With my parents, I tried HMOs. But it was a disaster. When I took them in for appointments, it wasn’t like a doctor’s office. It seemed more like an assembly line where patients were sometimes treated no better than a herd of cattle.
When his health was beginning to fade, Dad went to a hospital run by an HMO for a regular check-up, and they decided to keep him overnight. As fate would have it, the hospital had just cut back sharply on night staff. So, when Dad called for help in the middle of the night, no one came. He got up, tried to make it to the nurse’s station, fell in the corridor, broke his hip and never fully recovered.
I’m sure there are certainly some good HMOs in this country, but I decided I couldn’t afford the risk of winding up with a bad one. So I got my parents back on Medicare.
Unfortunately, Medicare failed to cover huge portions of their medical expenses. So to help bridge the gap, I got them Medicare supplement insurance, called “Medigap.†That way, they were free to choose their own doctors and to see specialists whenever they needed one.
The problem: Rampant rip-offs.
A friend of mine, for example, had his mom with Blue Cross & Blue Shield of Florida, which quietly jacked up his rates year after year.
That was disturbing enough. But his big shock came when the company sent him a letter with still another rate hike — up 12.6%.
That’s absurd. His mother’s Social Security benefits were tied to a 2% inflation rate, and the hike from Blue Cross was 6 times the increases she was getting!
Today, we see the same thing happening all over the country, and some companies charge outrageous rates for Medigap policies, especially if you live in a region with high medical costs.
Last I checked, one company here in Florida was charging $6,657 per year. For a couple, that would be $13,314. And that’s just for a supplemental policy designed to pick up where Medicare leaves off. Outrageous.
The only way to cope with all this: Comparison shopping.
The standard benefits of each Medigap plan were established by Congress. So a Plan A policy with one insurance company is virtually identical to a Plan A policy with another company. Same for Plan B, Plan C, and so on, all the way up to Plan J, the top of the line.
Since the benefits are standard, you’d think all the companies would charge pretty much the same. Not so.
Consider, for example, an 82-year-old woman living in Hot Springs, Arkansas. Last year, if she went to Equitable Life and Casualty, she would have paid an exorbitant $4,547 per year for a middle-of-the-road Medigap Plan F. But if she went to United World Life, she would have paid only $1,250 for the same policy.
Can you believe that? If no one told her about the cheaper policy, she could have paid more than triple the premiums she needed to pay. With the cheaper policy, she’d save a whopping $3,297 per year … and still get the same benefits!
The savings for her 77-year-old husband are similar. So that’s close to $6,600 in savings between them, per year. If they live another ten years or so — the couple could get all the coverage they need, plus they will have the ability to reap overall savings of nearly $66,000. With compounded interest, you’re talking six figures!
Here’s what I recommend:
1. Unless your HMO has been good to you, switch back to Medicare.
2. Check out the benefits of each plan (from “A” to “J”) and make sure you’re buying only what you really need. That alone will greatly reduce expenditures.
3. Then compare as many bids as possible to find the lowest alternatives among the most reliable companies.
Problem: Most Insurance Agents Can’t Give
You Quotes From Companies They Don’t Represent.
And even if they could, the information would be very incomplete. What about the state insurance departments? I called a few and found that most are of little help when shopping for insurance. Usually, all they’ll tell you is whether a company is — or is not — registered to do business in the state. That’s it! Not a shred of useful information beyond that.
The Medicare Administration does have a website at www.medicare.gov, which provides useful info. But still, no pricing information!
So we decided to do something about it. We created a computer program that automatically generates a custom comparison sheet for each of the ten plans — with the actual quotes you will get from each company, based on your personal circumstances.
We call our custom report the “Shopper’s Guide to Medicare Supplement Insurance.†It gives you a list of nearly all the insurers offering Medigap policies in your area, and it shows exactly how much each company will actually charge you for your Medigap policy.
For each of the 10 standard plans — from the no-frills Plan “A†to the top-of-the-line Plan “J†— the report contains a full page of companies, with their current price quotes that they will offer you.
Go to the Weiss Ratings web page for Medigap. Then just provide a few vital statistics we’ll need to produce your customized report — age, gender and zip code. Press “go†and the report will be instantly generated. It’s over 30 pages. But you can download it within seconds.
Or, we can handle it for you over the phone. Just call Weiss Ratings at 800-289-9222.
Good luck and God bless!
Martin
For more information and archived issues, visit http://legacy.weissinc.com.
About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Jennifer Moran, John Burke, Beth Cain, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
© 2006 by Weiss Research, Inc. All rights reserved.
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