Earn Stock Market Returns - Without Stock Market Risk 

An Interview with Steve McDonald

With unprecedented volatility in stocks, and with markets around the world sliding farther and farther into bear market territory, it has never been more important to allocate a portion of your assets to investments that are not highly correlated to stocks.

The great news is that you can still achieve stock market returns, without the stock market risk. To show you how to make 10-20% (and more) safely,Investor’s Daily Edge interviewed fixed income and corporate bond expert Steve McDonald.

And stay tuned… because at the end of this interview, we invite you to listen in on a live interview with Steve, where he reveals two opportunities to safely make 24% and 40% -- without the anxiety of the stock market.

To Your Success,

MaryEllen Tribby
Publisher
Investor’s Daily Edge
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IDE: Steve, why don’t we begin with a quick overview of what is going on in the market today?

Steve: Well, I think your readers are pretty well aware of the news that is out there. It’s pretty hard to miss. And I would venture that many of your readers have felt the pain in their own portfolio. Instead, I’d like to take a bit wider perspective.

For all intents, investors have been in love with stocks for almost 30 years. And for good reason. As an asset class, stocks have been a great investment for the last 30 years. But what you have to remember is that stocks do not ALWAYS outperform other asset classes. And if you want to keep your wealth and grow it safely, it pays to diversify into assets that do not move in lockstep with stocks, especially now!

IDE: So, let’s address the asset class that you recommend every investor have some exposure to – corporate bonds.

Steve: I believe every investor should have a percentage of their portfolio in bonds, especially now that equities are clearly entering a bear market. And the great thing about carefully selected corporate bonds is that you can match the returns you might expect from the stock market – 10-20% per year (and more) – without the volatility, without the anxiety and without the risk of owning stocks.

Corporate bonds give you the opportunity to invest in some of America’s best and strongest companies, but with only a small fraction of the risk associated with stocks. As a bondholder, you don’t have to guess which sector will outperform. You don’t have to know which company will increase their earnings the most… or have the best product on the shelves. You simply loan money. All you care about is that the company is still operating when your principle is due.

IDE: Start with the basics… what is a corporate bond? And how do you get paid?

Steve: It’s very simple. When a company needs money for operating capital or to expand, for example, they can raise the funds in three ways: (1) through existing revenues (2) by issuing stock or (3) by issuing bonds.

When you buy a corporate bond, you are simply loaning money to a company. That company is legally obligated to pay you interest, plus the face value of the bond at maturity. Corporate bonds are always issued at a face value of $1,000. I usually recommend bonds that are trading at a discount. That way you can add capital gains to the interest that is paid, boosting the total return.

Here’s how it works: Let’s say you purchase a bond issued by XYZ Company with a coupon rate of 7%. That means you will receive two interest payments each year, totaling $70 (7% of $1,000). Now, let’s assume you buy this bond for only $800 and it matures in January of 2010.

In this case, you would receive a total of three interest payments, equal to $105, plus the full $1,000 face value at maturity. In summary, you would receive a total return of $305 on your initial $800 investment. That is a total return of 38% in 18 months.

I don’t know about you… but to me, that’s a great return. Especially when you consider what is going on in the stock market, and that this is an investment with very little volatility.

IDE: Why don’t you discuss the other major advantage of bonds – that bondholders get paid first.

Steve: It’s true. Most people don’t realize this, but when you hold common stock and the company runs into trouble, you are the first in line to lose money and the last in line to get paid. All of the following obligations come before common stockholders:

1. Creditors with secured collateral

2. Unpaid wages

3. Taxes

4. Trade creditors

5. Unsecured debt holders

6. Subordinated unsecured debt holders

7. Preferred stockholders

8. Common stockholders

Their alternative (and a very attractive one) is to be the bank. Become a lender and put yourself near the front of the line by owning the company’s bonds. Even in the worst case scenario, when shareholders can be wiped out, bondholders often recover their full investment plus interest. Take the case of Bear Stearns, for example. Shareholders lost everything, while the company’s bondholders didn’t lose a penny.

By investing primarily in “investment grade” corporate bonds, where the historical default rate is exceedingly low, this risk is mitigated even more.

IDE: We are in an inflationary environment. What is the inflation risk and the interest rate risk associated with these bonds?

Steve: That is a great question. The strategy that I recommend performs very well even in an inflationary environment. First of all, the total return you should earn with each bond should more than outpace inflation. In fact, these bonds can be an excellent hedge against inflation for that reason.

And keep in mind also, that I only recommend corporate bonds with short maturities (anywhere from 12 to 24 months). That way, when you have a portfolio of these bonds, you will always have a couple that reach their maturity every few months. When that happens, you can roll those funds over to a new bond. And if interest rates are higher when you do so, you’ll reinvest those proceeds at an even higher rate.

We’re not talking about buying bonds and locking up your money for 10 or 20 years… no way! Five years is too much for most people today.

IDE: We understand that this is an asset class that is not directly correlated with stocks. But how else do you diversify?

Steve: Great question. The same way you diversify your stock holdings – by buying bonds issued by various companies in various sectors of the economy. If you’ve got a portfolio filled with two dozen investment grade bonds from many different companies, your risk of loss is quite small. Compared to stocks, you would have only a very small fraction of the same risk.

And not only that, this is an investment where you know exactly how much you are going to get paid and exactly when. You don’t have to lay awake at night wondering how the value might fluctuate or if you might have to get a part–time job in retirement just to pay the bills. And you won’t have to run to the computer every time there is a major market event. You simply get paid. Boring? Maybe. Profitable? Definitely.

And in today’s market, what more could you ask for.

URGENT ED. NOTE: Investor’s Daily Edge is presenting an urgent teleconference and extensive question and answer presentation with Steve McDonald on his corporate bond strategy. On this call, Steve will explain how you can achieve stock market returns – without taking stock market risk. He also provides the details on two bonds you can buy today – with legally obligated payouts of 24% and 40%. This FREE call will be broadcast TODAY. So, don’t delay… sign up here.