{"id":89104,"date":"2016-05-04T16:51:13","date_gmt":"2016-05-04T20:51:13","guid":{"rendered":"http:\/\/countingpips.com\/?p=89104"},"modified":"2016-05-04T06:52:55","modified_gmt":"2016-05-04T10:52:55","slug":"executing-the-sleeping-beauty-strategy","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2016\/05\/executing-the-sleeping-beauty-strategy\/","title":{"rendered":"Executing the Sleeping Beauty Strategy"},"content":{"rendered":"
May 4, 2016<\/div>
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By WallStreetDaily.com<\/u><\/a> \"Executing<\/p>\n

With the U.S. stock market near its all-time high, where do you go for decent income investments?<\/p>\n

Emerging markets<\/a> are less overvalued, but solid income investments among emerging markets companies are fairly rare, and withholding tax bedevils their yields.<\/p>\n

So the best strategy for an income investor today could very well be the \u201cSleeping Beauty\u201d strategy \u2013 put your money to bed for a few years, and wake it up when there are better opportunities in the markets.<\/p>\n

But there\u2019s a strategy behind this approach. Here are some suggestions on how to execute it\u2026<\/p>\n

Avoid These Poisoned Apples<\/h2>\n

The Sleeping Beauty strategy won\u2019t make you rich overnight. That\u2019s because, ideally, you shouldn\u2019t be in shares \u2013 your objective is to buy better income investments following a bear market.<\/p>

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And the likelihood of a bear market within the next 18 to 24 months increased last week with the revelation that first-quarter gross domestic product (GDP) grew only 0.5%.<\/p>\n

In addition, current U.S. share valuations are above average, in terms of price-to-earnings (P\/E) ratios, while earnings are close to record highs as a percentage of GDP.<\/p>\n

You can\u2019t sustain above-average P\/E ratios or record earnings in an economy where GDP is growing below 2% and productivity is growing well below 1% annually.<\/p>\n

Following the Sleeping Beauty strategy, you also shouldn\u2019t be in long-term bonds or high-risk corporate bonds.<\/p>\n

Long-term bonds don\u2019t yield much today, and they decline in price when yields rise, giving you a capital loss when you sell them to redeploy the money.<\/p>\n

Risky bonds become even riskier in a recession, giving you even larger capital losses.<\/p>\n

Nor should you be in real estate. Low interest rates have propped up real estate prices\u2026 but a rise in rates, coupled with a recession, would ding them.<\/p>\n

Furthermore, rental incomes fall off a cliff in a recession, as rental properties go empty and incur expenses. You also can\u2019t sell real estate in a recession.<\/p>\n

Finally, and more controversially, you shouldn\u2019t have more than a modest portion of your investments in cash.<\/p>\n

Cash gives you almost no income currently (although it\u2019s better than it was).<\/p>\n

But the biggest problem with cash is the temptation to invest it too early. If the stock market drops 10%, pundits all over the media will be blithering on about how stocks are now \u201creal bargains,\u201d and there are \u201cunparalleled investment opportunities.\u201d<\/p>\n

If you\u2019re holding cash, you\u2019ll be tempted to believe this nonsense and redeploy your money well before you should.<\/p>\n

Think of what you would\u2019ve lost redeploying money at the beginning of 2008, when the market was already down 10% from its peak, but had another 50%-plus to go.<\/p>\n

You need funds for emergencies, and perhaps 5% in cash just in case a truly unexpected redeployment opportunity arises \u2013 but no more.<\/p>\n

How to Execute the Sleeping Beauty Strategy<\/h2>\n

The best way to execute the Sleeping Beauty strategy is to invest in equal amounts of high-quality bonds of one-, two-, three-, four-, and five-year maturities. This strategy is called \u201claddering.\u201d<\/p>\n

It\u2019s typically executed in government bonds, but you can also use high-quality corporate bonds if you want a higher yield. But don\u2019t invest in anything rated below AA- or Aa3.<\/p>\n

As each tranche matures, decide whether to invest the money in solid dividend stocks, because yields have now risen to a level that gives you a decent income, or in another tranche of five-year bonds.<\/p>\n

Your principal is preserved by holding each tranche to maturity. Although, if the market is at a truly exciting level \u2013 say the Dow is at 4,000 and 10% dividend yields abound \u2013 you could sell the tranches that are still outstanding for a modest loss compared to the gain of buying stocks at such low prices.<\/p>\n

That\u2019s why it\u2019s called the Sleeping Beauty strategy. Essentially, you \u201cwake up\u201d 20% of your money each year for the next five years to see if the handsome prince of decent income investments has arrived.<\/p>\n

If there\u2019s no prince, simply put your money back to sleep for another five years.<\/p>\n

But if a prince has brought income opportunities beyond your wildest dreams, wake up the other four-fifths of your money and suffer the modest loss of waking it up early.<\/p>\n

Most of the time, you\u2019ll only invest one-fifth, just in case next year brings a better prince.<\/p>\n

In today\u2019s market, you\u2019ll get a running yield of 0.94% on a ladder of one- through five-year Treasury bonds. If you need 4% per annum to live comfortably, you\u2019ll have to dip into 3.06% of your capital in the first year and each year your money is asleep.<\/p>\n

But even after five years, you\u2019ll have absorbed only 15.3% of your capital. And if the other 85% is invested in stocks at average prices \u2013 30% below today\u2019s prices \u2013 you\u2019ll be well ahead of the game.<\/p>\n

For us humans, sleeping for several years ages us and shortens our waking lives, which is why we don\u2019t do it.<\/p>\n

But our money doesn\u2019t age. So if the market is close to record levels, a Sleeping Beauty strategy can make it worth much more in terms of the stocks it will buy.<\/p>\n

Good investing,<\/p>\n

Martin Hutchinson<\/p>\n

The post Executing the Sleeping Beauty Strategy<\/a> appeared first on Wall Street Daily<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

By WallStreetDaily.com With the U.S. stock market near its all-time high, where do you go for decent income investments? Emerging markets are less overvalued, but solid income investments among emerging markets companies are fairly rare, and withholding tax bedevils their yields. So the best strategy for an income investor today could very well be the […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-89104","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/89104","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=89104"}],"version-history":[{"count":3,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/89104\/revisions"}],"predecessor-version":[{"id":89122,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/89104\/revisions\/89122"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=89104"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=89104"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=89104"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}