Obvious Is Often Better

An important element to building a relatively low stress portfolio is heeding the obvious. I am motivated by a couple of different things for this post.

First is the action today in Fannie Mae (FNM). Anyone that has followed the market over the last few months (longer actually) has known that Fannie has had some serious threats to the way they operate. The stock is down from $75 last September. Multiple threats to how a company conducts it business is reason for most investors to stay away. There are plenty of professional investors for whom an assessment of the risks and then a decision to buy (in generic terms, not specific to FNM) is suitable because of the nature of the fund they may run. I don't think that description applies to too many individuals. It seems like everything has gone wrong for this stock. What would have happened if everything had gone right for Fannie? How well could it have done? That is not knowable it might make sense to think of it this way. It might have done a little better than the group overall but a do-it-yourself investor could have probably captured most of the move, more dividend with substantially less risk in a lot of different names or even a sector ETF. This type of analysis does not require any keen insight. To my way of thinking the potential for a few extra percentage points reward is not worth all the extra risk taken.

This type thing will happen again and again in our investing lives.

It may be happening right now somewhere else. First, if your so inclined, listen to this interview of Mariana Bush, the CEF analyst from Wachovia. Ms. Bush believes that income investors do not need to sell leveraged, muni CEFs even though she sees visibility for higher rates and reduced dividends. If you listen to the interview she says that these funds may face 5% of downward price pressure. I'm gonna say "not likely." I'm thinking that there will be a much nastier decline if/when they start to move at all. I believe Ms. Bush fails to take into account the sense of investor sentiment that sometimes moves these types of funds. Her hold'em don't fold'em thoughts make more sense for unleveraged funds. The spread between the NAV and the market price often moves on emotion. For a history lesson of what is possible look at a few different funds in July, 2003. Most of the people I've known that considered themselves income investors don't want the type of volatility that may go with a big move in rates.

The potential for volatility can be managed a few different ways. An investor can add some short duration funds or inverse bond funds. Another possibility might be to raise some cash for a short while and there are more ways still.