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Time Is Your Most Important Investing Asset



If you have money to invest, what’s keeping you from realizing higher gains? Probably time.

You build wealth through investing by keeping your money in the market. Take it out too early, and you risk losing out on a significant amount of money over the course of your life. As James Royal writes for NerdWallet, “your length of ‘time in the market’ is the best predictor of your total performance.” Here’s why.


(Note: That doesn’t mean “timing the market,” as in trying to bet when the best time to buy and sell is. In fact, that’s a terrible way to try to make money, and you’ll probably always lose.)

The S&P 500 has historically returned around 10 percent annually not including dividends, but that doesn’t mean you can invest one day and then cash out a year later and expect 10 percent more money. You need to stay in the market. Royal writes,

Over the 15 years through 2017, the market returned 9.9 percent annually to those who remained fully invested, according to Putnam Investments. However:

  • If you miss just the 10 best days in that period, your annual return drops to five percent.
  • If you miss the 20 best days, your annual return drops to two percent.
  • If you miss the 30 best days, you actually lose money (-0.4 percent annually).

You can’t “time” the market to hit just the best days. You’re riding out volatility, and you’re benefitting from compounding returns and dividends. There’s a reason everyone tells you to start early: The sooner you do, the more money you’re likely to end up with. You have time on your side.


So, why do people miss out on the gains? As Royal notes, it comes down to fear and greed. Fear is more or less not understanding the market—if, say, you were born in the mid-1980s and watched everything collapse as you were leaving college in 2008, you’re probably reluctant to throw everything into the market. But waiting for stocks to start climbing—when the market is “safe”—is a terrible idea. There’s no ideal time to invest, except a long time.

Greed is wanting things to be more interesting, to beat the earnings of “average” investors. Because none of us want to think we’re average, right? But as I’ve written before, the building blocks of your finances should be boring: Invest in low-cost index funds, consistently, for a long time. If you want to invest in individual companies, do your research first, and consider how the company will be doing in 10 or 20 (or more) years.


Nothing is guaranteed, but investing for the long run—so that the market has time to dip and recover, as it always has—is going to be the best strategy for most people.

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Opportunity Zones May Help Investors And Syndicators More Than Distressed Communities




(AP Photo/Jonathan J. Cooper)

The Tax Cuts and Jobs Act (TCJA) created a new tax-advantaged Opportunity Zone program to encourage investments in economically-distressed communities that are nominated by governors and certified by the Treasury Department. Congress had previously tried similar approaches with Empowerment Zones and Renewal Communities. But its latest effort is remarkable for its lack of a governmental oversight role and for its generosity to investors.

The law allows taxpayers to postpone until 2026 taxes on profits from the sale of any property, if the profits from the sale are reinvested in an Opportunity Zone fund that, in turn, invests in businesses in a targeted community. It also allows taxpayers to exclude from tax any gains that arise from investing in the fund if the fund is held for 10 years. This opens the door to big profits for both investors and syndicators, even as the social benefits of the initiative are unclear at best.

The process works like this: Assume a taxpayer recognizes a $200,000 profit on the sale of stock in a public company. By investing the amount of the gain in an Opportunity Zone fund, she can postpone capital gains taxes until 2026. If the taxpayer holds her Opportunity Zone fund shares for five years, her $200,000 deferred gain is reduced by 10 percent, to $180,000. After seven years, it is reduced by another 5 percent, to $170.000. And, if she sells after 10 years, she may exclude any appreciation in the value of the Opportunity Zone Fund shares. Thus, if she sold her fund shares for $300,000, she could exclude from tax her entire $100,000 gain (her basis would be $200,000, even though she had recognized only $170,000 of deferred gain). Investment banks, syndicators, or anyone else may establish opportunity zone funds.  For a fee, of course.

The Joint Committee on Taxation scored the new tax incentive program as a small revenue loser over the budget window, primarily because the deferred gain must be recognized by 2026, which was within TCJA’s 10-year budget window. But because the incentives for Opportunity Zone investments are so much more generous than prior programs, the revenue loss might turn out to be substantial, and far out of proportion to the local economic development they are intended to encourage.

The new Opportunity Zones have three novel features:

First, a taxpayer need only reinvest gains, not the entire proceeds from a sale of assets. The capital gains provisions of the earlier programs noted above required a taxpayer to reinvest all sales proceeds, not just profits.  Other provisions in the tax code that defer gains also require reinvestment of all proceeds (e.g., like-kind exchanges, involuntary conversions, etc.).

Second, the other programs permitted a taxpayer to defer gains from the sale of assets within a qualified zone, but not defer gains from the sale of assets outside the zone.  Another change:  Empowerment Zone and Renewal Communities programs permitted only capital gains to be deferred, but the new program appears to permit other income to be deferred, like gains from the sale of inventory, though this may have been a drafting error.

Finally, syndicators may organize and market the opportunity funds, which can invest more expansively than earlier programs could. The Treasury has certified 8,700 Opportunity Zones, twelve percent of U.S. census tracts, many of which already attract businesses and investments. By comparison, Congress authorized only 40 empowerment zones and 40 renewal communities.

In addition, eligible Opportunity Zone businesses are more wide-ranging, including investments such as residential rental property businesses, which were excluded by the earlier programs. The additional businesses may be lower risk for investors and, perhaps, less beneficial for the community.

The fundamental problem with Opportunity Zones is the disconnect between the size of the potential tax costs, which are uncapped, and the social benefits from the investments, which will be hard to measure.  Presumably, some taxpayers will recharacterize already-planned projects or restructure existing business arrangements through, for example, sale-leasebacks, to obtain the new tax incentives.  Other taxpayers may try to invest in already-gentrifying areas that were nominated by governors, lessening the focus on economically distressed communities.  And, syndicators may lure other taxpayers with the promise to delay and even eliminate taxes.

We will not know for some time whether the program is worthwhile since Congress asked the IRS to begin reporting on the operations of the program in 2022. But as with many tax incentive programs, Congress might have created a more effective program by investing directly in distressed communities rather than creating new tax subsidies for investors and additional cash flows for syndicators that develop and market the deals.

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Use Leverage To Multiply Your Success In Real Estate Investing





One of the most powerful advantages in real estate investing is financial leverage. Leverage is generated by using borrowed capital as your funding source when you invest. This allows you to buy a much larger asset and increase the potential return on your investment than you could if you had to pay 100% of the purchase price upfront. As real estate experts like to say, leverage enables you to make money on other people’s money. In fact, it is somewhat surprising to new investors that the less cash you invest, the higher your leverage and your return, both from property appreciation and rental income.

The Power Of Leverage

Many people understand the power of leverage in principle, but are a little unclear about how it plays out in practice. Consider this example: An investor has $50,000 to put toward single-family rental real estate. There are a number of options for how to use this capital, including:

• Option 1: Buy a $50,000 property for cash. This approach produces no leverage.

• Option 2: Put the $50,000 toward the purchase of a $100,000 property, using financing like a bank mortgage loan to cover the other $50,000. This produces 50% leverage.

• Option 3: Put the $50,000 toward the purchase of two $100,000 properties, again using financing to cover the remainder of the purchase price. This produces 75% leverage, and spreads your potential gains and risks over two properties.

If property values increase 6%, the investor achieves these gains based on appreciation alone:

• Option 1: $53,000 property value for a $3,000 gain on the cash invested.

• Option 2: $106,000 property value for a $6,000 gain on the cash invested.

• Option 3: $212,000 property value for a $12,000 gain on the cash invested.

Thanks to the principle of leverage, each of these returns can be realized using the same $50,000. In other words, the more leverage an investor uses, the higher the potential gain from asset appreciation. Experienced single-family investors know that not every property makes money, especially in the short term. Using leverage to diversify your portfolio and buy more properties also creates an environment where you reduce your overall risk from vacancy loss, decline in value, capital improvements, etc.

The Optimal Conditions For Leverage

The concept of leverage in real estate investing is most effective when property values and rents are rising. Fortunately for real estate investors, those conditions prevail in most areas around the country today. However, if values and/or rents stagnate or decline, the advantage provided by leverage can quickly disappear as your loan payments increase your carrying cost for the property. This reality drives home the importance of two key practices for leveraged investors.

The first is performing comprehensive due diligence about the investing environment. How have property values trended in the area? What known factors, like the arrival or departure of a major employer, will influence the economy in the months, years and decades ahead? What are the expectations for the broader regional and national economy for the foreseeable future? The answers to these and related questions are critical.

The second key practice is developing a sound investment strategy. Is this a short-term or long-term play? If it is a short-term tactic, what factors will signal that it is time to exit? If the goal is long-term gains, what can be done to “weather the storms” that are likely to occur?

Using Leverage Wisely

To ensure that leverage is working for you rather than against you, keep these tips in mind:

• Be conservative in your appreciation expectation. Just because property values and rents have increased 5% annually in your target area in recent years doesn’t necessarily mean they will this year or in the years ahead. It’s much safer to build your financial strategy around a slightly lower expectation and then be pleasantly surprised if returns are higher than you anticipated.

•Get a payment you can live with. The idea of acquiring a single-family property with little down can be appealing, but the higher monthly obligation can become a problem down the road, especially if you have a month or two of unexpected vacancy. It is important to find the right balance between your down payment and your monthly payment.

• Keep your focus on cash flow. With the purchase of rental properties, the particulars of the transaction are important. However, so is the ongoing operation of the property. Can you keep the home occupied and at a rent that covers your costs? The answers to both questions must be yes if you are to turn a profit.

Used properly, leverage is one of the best ways to increase your real estate net worth. And, thankfully, new investors don’t have to go it alone. There are many resources available for learning more about investing and many experts who can help you get your feet wet while minimizing your risk. Then, equipped with properties that are providing positive cash flow and a better understanding of the business, you can begin taking greater advantage of leverage to expand your portfolio.

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The recent struggles of Bill Gross exemplifies the dangers of bond fund investing in today's volatile market




For a long time Bill Gross dominated a fixed-income space that is hard to categorize: unconstrained bond market investing. Managers of unconstrained funds don’t hew to any benchmark, single bond grade, geography or maturity — they can take their portfolios anywhere to generate return for shareholders.

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But the legendary investor has struggled lately in the only place it counts: performance. His Janus Henderson Global Unconstrained Bond Fund (JUCIX), with a return of –6.6 percent through August 16, is among the worst performers in its category year-to-date, according to Morningstar, as well as over the past one-year and three-year periods.

Gross told CNBC earlier this year that European volatility was to blame for the bad performance and that a bet on weakening German bond prices and a rise in U.S. treasurys would provide a windfall for his investors if they’re patient enough.

In the past month, things have improved slightly, as the fund has eked out a positive return and is slightly above the Barclays U.S. Aggregate Bond Index. But last week Gross’ boss, Janus Henderson CEO Richard Weil, addressed Gross’ underperformance in an interview with CNBC’s “Worldwide Exchange,” saying that Gross “has been wrong and wrong badly” this year.

The Janus Henderson Global Unconstrained Bond Fund suffered more than $200 million in redemptions last month, according to Bloomberg, lowering assets to $1.25 billion from over $2.24 billion in February. “He’s just got to work it through,” the Janus Henderson CEO said.

Gross did not respond to requests for comment.

The struggles of the investing guru highlight key bond market issues that many investors face: Where to generate returns in the bond market during an era of low volatility, how to achieve income at a time of historically low interest rates, but at the same time — as U.S. rates are rising as a function of Federal Reserve post-quantitative easing policy — how to invest in a bond market where price appreciation will be difficult to attain.

The unconstrained approach seems to offer an answer: Rely on an individual manager’s smarts to outwit the market. But investors who went with Gross have learned the hard way that even though picking bonds has a better track record versus the index than picking stocks, it is by no means a sure thing. If you choose a manager that swings for the fences, there will be periods of time when they miss badly. The least an investor must do when investing in an active bond strategy is understand what the portfolio manager is trying to accomplish.

“This is a competitive individual who wants to do well, but you can’t strive for much worse,” said Barry Glassman, founder and president of Glassman Wealth Services, which specializes in alternative asset-allocation strategies and who is a member of the CNBC Digital Financial Advisor Council. He said that when investing with a manager like Gross, who can buy bonds anywhere, investors need to be prepared for multiple years of lackluster performance.

Glassman said the strength of the stock market and, as interest rates rise, core bonds being the only negative part of many investors’ portfolio, has led more people to look for “the Holy Grail of bond funds” that can do well whether rates go up or down.

“Sometimes they will find it and sometimes they won’t. The challenge I have with unconstrained funds is, I don’t know what is in there and I can’t predict what is going to be in the portfolio,” Glassman said.

There are more than 250 mutual funds taking the unconstrained approach to bond investing, also defined as alternative credit by Lipper and nontraditional bond by Morningstar. These bond funds hold roughly $100 billion in investor assets, according to Lipper, and in the year-to-date, one-year and three-year periods through August 16, this category has beaten the Barclays Aggregate Bond Index by a significant margin.

As unconstrained managers make tactical portfolio shifts, there also is a risk that an investor with more than one bond fund ends up with double the exposure to the same fixed-income trade in their portfolio, and that can magnify the losses during periods when the unconstrained manager bets wrongly. Many of the top-performing unconstrained managers right now have a high degree of exposure to the mortgage-backed securities market, but the core Barclays Aggregate maintains an exposure to the mortgage market that is above 30 percent.

“You need to know what is in your bond fund, unless it is an index or the title is really specific and the manager follows it, like intermediate municipal bond,” Glassman said. “You need to take the extra step and monitor the mandate of the manager. Whatever they have done in the past three years can completely change, and they have a brand new portfolio tomorrow.”

The good news is that most fund companies go beyond basic requirements in terms of sharing portfolio level details, which can be reviewed on fund web pages or through third parties to which mutual funds report holdings regularly, such as Morningstar.

The issue is not whether active management works in fixed-income — in fact, many actively managed bond ETFs have been beating bond benchmarks and the long-term data from S&P Dow Jones Indices shows that active bond is more compelling than active stock picking. Comparing a ‘go anywhere” manager to a core bond benchmark like the Barclays Agg over a seven-and-a-half month period isn’t fair either, Glassman said. At the same time, maintaining outperformance — which has always been an issue for stock pickers — is an issue in the fixed-income universe as well. According to Lipper data, alternative credit funds have slightly trailed the Barclays Aggregate in the past five-year and ten-year periods.

Glassman uses active bond funds, but each has a clear approach that he understands, and he is prepared to monitor when the approach changes. One is the Templeton Global Bond Fund (TPINX) led by Michael Hasenstab, which over the long-term (both 10- and 15-year periods) ranks highly among peers. The Templeton fund owns emerging markets debt — a risky area right now given concerns about the strong U.S. dollar and years of dollar-based borrowing in the region — but Hasenstab also shorts various global currencies as part of his strategy. So even when the dollar soared after Trump’s election and overseas bonds got hit hard, the fund was positive because of currency shorts.

Even with core bond exposure for retirement assets, Glassman wants an average maturity of bonds that is lower than the Barclays Agg at a time of rising rates and depreciating bond prices. He has been using the Dodge & Cox Income Fund (DODIX) which has an average duration of 4.4 vs. 5.9 for the Barclays Agg. The Dodge & Cox fund has outperformed most peers recently, and over the long-term, consistently beating the benchmark.

Mitch Goldberg, president of investment advisory firm ClientFirst Strategy, said there are so many bond ETFs available today that advisors and investors worried about rising U.S. interest rates can create a strategy of varying maturities and geographies without having to use an active bond manager. He said the idea of unconstrained bond investing makes sense: an investor can achieve not only income but total return that is uncorrelated to the rest of the bond market. But when these funds are generating returns no better than, or even worse than, a core bond ETF like the Vanguard Total Bond Market Index Fund (BND), investors are going to be disappointed. “Active managers need long lead times,” he said.

The era of quantitative easing tamped down the volatility not only in the stock market but bond market as well, and that makes it harder for unconstrained managers to find the arbitrage opportunities between sectors. “Everyone has to acknowledge that central bank policy has tamped down volatility and reduced the need for active management. It won’t be like that forever. But for a monster-size manager like Gross, his best days were before central bank policy saved the universe,” Goldberg said. Unconstrained managers need more volatility and more frequent narrowing and widening of spreads between bond asset classes.

5 unconstrained bond funds that are outperforming

Here are the five top alternative credit funds over the past one-year period, according to Lipper data, and the strategies their managers have targeted:

Highland Opportunistic Credit Fund (HNRAX)
One-year return: 10.5 percent

While this fund refers to itself as an unconstrained strategy, Morningstar classifies it as high-yield and co-manager Trey Parker said his fund prefers to invest in companies that are undervalued or misunderstood. He pointed to Fieldwood Energy as a good recent investment, noting that the loan appreciated from 60 cents on the dollar to 98 cents.

“We really are industry agnostic, so we will invest across industries depending on the opportunity set,” he said. “We’ve invested in healthcare and telecom, and those are two very interesting sectors these days. We identify big macro-themes and we look for where there are shifts in an industry.”

Its performance can swing significantly: It was down more than 26 percent in 2015 and up more than 30 percent the next year. Over the past 10-year period, it has beaten the Barclays Agg, but trailed the Morningstar high-yield category average.

Ascendant Tactical Yield Fund (ATYAX)
One-year return: 5.7 percent

Co-manager Porter Landreth said the most reliable trend in the marketplace right now is rising short-term interest rates in the U.S., so its safest positions are in adjustable and floating rate instruments. The fund invests 75 percent of its assets in adjustable-rate mortgage bonds and 25 percent in floating-rate bonds.

Landreth said there is tremendous value in adjustable-rate mortgage bonds. “Only the quality bonds are left in those tranches that were forced to be dumped during the financial crisis.”

Fundamentals are strong for these securities as real estate value across the country are up and collateral has greatly improved from the crisis period, Landreth said. As a result, these mortgage bonds “may be higher quality than they appear.”

The fund has beaten the nontraditional bond category average and Barclays Agg return in the year-to-date, one-year and three-year periods, according to Morningstar.

Nationwide Amundi Strategic Income Fund (NWXEX)
One-year return: 5.2 percent

Co-manager Jonathan Duensing said the fund invests across market sectors, across maturities, and while being U.S.- focused, will invest outside the U.S. to gain some global exposure. Varying the duration of bonds has made the fund less sensitive to interest-rate movement.

Right now, like other successful funds, Duensing is finding opportunities in the securitized credit market. Consumer balance sheets are in good shape and housing is in demand, so fundamentals are strong. “From a valuation standpoint, the securitized credit market versus the corporate bond market, the valuations are absolutely compelling,” he said.

The fund has beaten both the Barclays Agg and its bond category year-to-date and in the past year, though Morningstar classifies it as a multi-sector bond fund rather than unconstrained bond fund. The major differences: multi-sector managers tend to stay within a preferred group of bond areas to invest, whereas unconstrained managers tend to make tactical shifts more frequently and focus more on interest-rate risk.

Putnam Diversified Income Trust (PDINX)
One-year return: 4.8 percent

Portfolio co-manager Bill Kohli said minimizing interest-rate risk has been key to his fund’s success. He said the Putnam Diversified Income Trust starts at a duration of zero and then mixes bonds of different durations to minimize exposure to the Fed’s interest rate moves.

Like Ascendant, a focus on securitized bonds, such as mortgages, that took a beating in the financial crisis, has been a key to performance. “Many market participants have either been regulated out of the market or management deemphasizes those areas where they got their fingers burnt,” Kohli said. “So if you’re an investor or fund manager you’re getting paid an attractive premium to move into the space because the market hasn’t healed yet. The spreads you are getting are not representative of fundamental loss risk.”

This Putnam fund has generated its biggest performance edge against both the nontraditional bond fund category average and Barclays Agg in the past year, but has maintained a more narrow outperformance over the long-term.

Braddock Multi-Strategy Income Fund (BDKAX)
One-year return: 4.8 percent

Co-manager Garrett Tripp said the keys to his fund’s success are two-fold: the fund uses a floating-rate strategy for the rising interest-rate environment, and the managers focus on structured finance. It invests primarily in high yield asset-backed debt securities, residential mortgage-backed securities and collateralized loan obligations.

Tripp said after the housing crisis, underwriting standards tightened which led to better credit markets and builders retrenching, causing a shortage of supply in entry-level homes. “This will keep housing prices from falling,” Tripp said. “We’ll have high recovery rates in our RMBS even if someone wants to default.”

Dodd-Frank reform has also made structured finance more regulated, driving up the quality of the bonds.

The fund has beaten both the Barclays Agg and its category average year-to-date and in the past year, though like the Nationwide Amundi Strategic Income Fund, Morningstar classifies it as a multi-sector bond fund rather than unconstrained bond fund.

By Mike Schnitzel, special to CNBC. Additional reporting by Eric Rosenbaum

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