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I’ve been getting a lot of great questions in my editor’s mailbag, and today I’d like to address some of the most popular issues that have been coming up.
Let’s start with one on Master Limited Partnerships. One reader sent in the following …
“I have an opportunity to invest about $70,000 for the next 10 years and don’t need to touch it. The MLPs you’ve recommended look awful enticing … what would be the downside to investing all my money in them now?”
First, for the benefit of readers who don’t know what MLPs are, let me give a quick recap.
These special companies — which typically run oil pipelines and other natural resource-focused operations — are required by law to pay out most of their cash flow in the form of regular dividend distributions.
The bulk of the quarterly distributions are considered a return of capital and not taxable investment income. That means most of your distributions are tax deferred.
Even better, many of these companies are currently yielding 5 percent, 6 percent, 7 percent or more annually even after big run-ups in price.
We currently have two MLPs in the Income Superstars portfolio, and I’m tracking an open total return of 16.7 percent on one and an astounding 120.4 percent open profit on the other!
So in short, yes, I think MLPs can be great income investments — especially if your timeframe is a decade out.
However, I wouldn’t tell anyone to commit ALL of their investment dollars to any single company or even any single type of company.
That’s even more true if the investment is going to happen at one single point in time!
The reason is pretty simple: No matter how solid something looks, and no matter how great its performance has been, unanticipated events happen. Entire markets sell off. And babies are thrown out with the bathwater.
The downside of putting everything you have into one or two MLPs is that you just have unfortunate timing or a company-specific event sends the share price plummeting.
So I think it’s far better to invest smaller amounts of the money into a handful of MLPs and other dividend-paying firms over a few months (or longer) to spread out the overall risk a bit more.
Speaking of limiting losses, another reader recently wrote in with the following question …
“I read your recent article in Money and Markets about writing puts on stocks you want to own. Should I have stop loss orders on the options I write just in case of an implosion? How would I do that?”
As I pointed out in the article, there is one big risk when it comes to writing puts: Namely, that the underlying stock will suffer a large price and the option holder will put those shares to you.
In this scenario, you could get stuck with an immediate paper loss.
Since the option holder can exercise the option at any point, there’s really no way to protect yourself against that risk without throwing another options contract into the mix — one that hedges the overall bet.
Meanwhile, even if you were able to place a stop loss order on the put with your broker, please remember that stop losses are not fool-proof.
Just because you set a limit at a certain price does NOT guarantee that your order will be executed at that price. It only guarantees that your position will be closed at the best price once that threshold has been crossed.
In other words, you can still take a big hit if the change in price drops quickly and your limit converts to a market order at that price.
Because of all these confusing aspects, I recommend writing puts only on stocks you’d be happy owning for the long-term. That way, even getting put the shares at an underwater price, while less than ideal, is not a major or immediate problem.
“When do you think would to be a good time to buy the TARP warrants you recommended?”
Well, the best time was probably when Tom Essaye and I initially issued our report back in December!
Since then, all of the investments originally recommended have risen in value — with an average gain of 28.4 percent, and some individual positions up as much as 29.4 percent, 46.4 percent and 62.7 percent (through 9/20/12).
That said, one of the biggest advantages of these niche vehicles is that they give you a lot of time to profit. And Tom just issued an update to the original report last week … so grab your copy today if you want to know what specific TARP warrants look most attractive going forward.
“I’ve been reading a lot of articles about how the government wants to hijack our 401(k) and IRA accounts. Just wondering if it’s still in talks or is going to become more serious with the financial cliff coming soon. What is your opinion on getting money out of IRAs and 401(k)s?”
I’m actually working on a brand-new presentation all about Washington’s continued attack on everyday American retirements … and I hope to have it ready very soon.
For now, let me say that there ARE some pieces of legislation circulating that talk about further nationalizing retirement savings plans.
I am not currently in the camp suggesting that people cash out their private retirement plans right now. That’s because I think the taxes and penalties that would IMMEDIATELY and DEFINITELY be owed outweigh the future threats to existing accounts at this point.
However, I’m still researching some of the latest developments and could change my opinion as things evolve and new facts come to light. So continue to look for updates on this topic going forward.
Best wishes,
Nilus
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Nilus,
I’ve been a subscriber to Income Superstars since early on -very straightforward and well done. But in yesterdays’s article you referenced the TARP warrants newsletter that originally was offered almost a year ago. It was only for 500 subscribers. It appears to be the same offer (for 2012). So what is different? Is this still as relevant as a year ago? Did you not sell all 500 copies? What do we get going forward that would be different? I am interested in the concept but I am not sure what I am getting (something outdated?).
Hi, Rick. Thanks for the comments. When Tom and I originally wrote that report in December, we said it would include four updates. Tom recently sent the second update out … so we are basically offering people the chance to get a copy or the original report now, the second update, and then the two additional updates that will be issued going forward. That way the information is current. The confusion probably comes from the fact that we simply used the same original description page from December. Hope that clears it up!
Thanks,
Nilus