By
Dr. Steve Sjuggerud
Wednesday, September 2, 2009
Where can you get paid 11% interest with only a 0.01% chance of losing any of your principal?
You know that shouldn't be possible, right?
You know the rules. They're ironclad...
1) If you take basically no risk, then you earn basically no return. Right now, money in the bank is paying 0.13% – no risk, no return.
2) If you take a lot of risk, you might earn a decent return... but you might lose your money. Money invested in stocks over the last 10 years, for example, is down in value. So if you took a risk in stocks in hopes of a big return... you lost.
What I'll show you today completely defies these rules.
It isn't a gimmick. It is real. You do have the opportunity right now to earn the equivalent of double-digit interest rates... in an investment that has a historical record of next-to-no risk.
It is an incredibly "boring" investment. But it makes real money. In mid-January, I told subscribers to my True Wealth newsletter how to take advantage... They're up over 8% already, without worrying much at all.
And right now, there's still an incredible opportunity to earn big income with next-to-no risk... in municipal bonds.
Whether you realize it or not, you know "muni bonds"... Whenever you pay your toll on a state toll road, for example, you're paying interest on a municipal bond. To build the toll road, the state borrowed money by issuing muni bonds. It pays the investors who bought those municipal bonds with income generated from that toll road.
Management firm PIMCO calls itself "the Authority on Bonds." Rightfully so... It manages three-quarters of a trillion dollars, mostly in bonds.
In a study from a few years ago, PIMCO said that "from 1970 to 2006 the default rate for munis has averaged 0.01% annually." In other words, only one out of 10,000 municipal bonds defaulted.
Furthermore, PIMCO said about municipal bonds that "even during the Great Depression, the average annual default rate was 1.8%, with 97% of the defaulted principal eventually recovered." So two out of 100 bonds defaulted during the Great Depression, but investors recovered a full 97 cents on the dollar...
Said another way, the lesson from the historical record of municipal bonds is that there's next-to-no risk to your money. But investors are scared today... so they've driven interest rates on municipal bonds up to absurd levels.
Take the Van Kampen Municipal Trust (symbol VKQ), for example. This is a fund with over $800 million in assets. It's currently paying a dividend of nearly 7% – TAX FREE. If you're in the highest tax bracket, you'd have to earn 11% in a taxable investment just to equal this 7% tax-free payment.
I believe in the very near future, the top income tax rate could go to 50% or higher. At that level, you'd have to earn 14% interest in a taxable investment to equal a 7% tax-free investment. Now that is a tall order!
When tax rates go up (as I'm certain they will), the demand for tax-free municipal bonds will soar. The result will be big capital gains in muni-bond funds like VKQ.
Right now is the perfect time to buy municipal bonds. You get paid a comparatively high rate of interest for what has historically had essentially zero risk. AND you are virtually assured of making capital gains when taxes go up and people start buying them again for tax-free income.
Municipal bonds are ignored by investors, they're selling at once- in-a-lifetime values, and they're in an uptrend (the fund I told True Wealth readers about is hitting new highs). Hated, cheap, and in an uptrend – that's exactly what we look for in an investment.
If you haven't done so already, it's time to add some municipal bonds to your portfolio now... It's the safest, highest-interest investment (after tax) you can make today. And you could make big capital gains here, too. Great stuff!
We pointed to a slight decline in Chinese stocks and noted it was looking like a classic "break" of the big uptrend it began in November. Today, let's note that decline has turned from "slight" to "severe."
From their November lows to their August highs, Chinese stocks gained 103%. It was the biggest rally in the world for a large stock market. But as today's chart shows, that run has ended. China is down more than 20% from its high... and has sliced through its trend line.
A market that runs so far so fast then declines so sharply is the equivalent of a sprinter rounding a corner only to get hit in the face with a pipe. At the very least, he's going to take a good while to recover his bearings and start moving again. At the worst, he lands face-first in the dirt. Given the popularity and high valuations here, we think the latter is likely for Chinese stocks.
This Popular Trade Is a Comfort Trap By Tom DysonTuesday, September 1, 2009
The majority of investors flock to comfort trades. So by taking comfort trades, you end up on the same side of the trade as the crowd. And that's always where the losses are...
What the Mainstream Headlines Won't Tell You About Housing By Dr. Steve SjuggerudFriday, August 28, 2009
As an investor, I'm seeing what I love... It's an ideal situation that rarely comes along, but is incredibly important if you can recognize it. It's when people's emotional opinions are clearly at odds with the reality of the numbers.
Don't Forget to Look Down By Dan FerrisThursday, August 27, 2009
It's really difficult to know if stocks are overvalued or undervalued right now. The solution to this is simple, but almost impossible for most investors to execute...
