A steady investment portfolio can mean a steady stream of income in retirement.
Controlling volatility by looking at the capital structure of assets within a portfolio can help keep income steady in different economic climates, according to Louis P. Stanasolovich, a certified financial planner and founder, CEO and president of Legend Financial Advisors, Pittsburgh.
In the March edition of Risk Controlled Investing, Stanasolovich looks at ways to monitor portfolios such as looking at the capital structure of corporations.
Corporate entities with “shaky capital structures” may not recover from a recession so “it is important to be at the top of the corporate capital structure” in order to survive any company bankruptcies. One of the best ways to accomplish that is to own only senior-secured bank loans.
These investments are often secured by collateral, such as plant or equipment, and are given priority over other classes of loans, preferred stocks and common stocks, he says in the newsletter. He notes that “Historically, default rates on these types of loans are only approximately two-thirds that of junk bonds because of the tight borrowing standards set by banks.”
But even so, he continues, “we don’t believe the credit crisis is over” and believe that these types of loans and the mutual funds that own them will continue to have problems. Consequently, “we believe the more prudent approach would be to cut losses and utilize high grade securities such as treasuries and government agency bonds as well as money market funds for the fixed income portion of portfolios.”