Saturday, February 1, 2014

Link to article on MORL

When I used the screener function offered by my self-directed investment software, I discovered MORL, an ETN leveraged product with a yield of about 24 percent. Talk about warning bells going off in one's head. It was a genuine "Danger, Will Robinson" moment.

If you're curious about MORL and would like to know more, here is a link:
MORL: Stupid Income Investment of the Week.

I confess that I own what very well might be simply a more conservative version of the MORL ETN: REM from iShares in the States. I've lightened my investment in REM recently as the American Fed appears to pulling back from its recent monthly buybacks of mortgage backed securities.

Just how risky is MORL? I took this question to an investing seminar at our local TD Waterhouse branch. The TD rep had no experience with either REM or MORL. He did not see REM as particularly frightening in the short term. But, he made it clear, his understanding of the workings of either investment was essentially nil.

At the end of the month, a rep from iShares is going to be speaking at the TD Waterhouse office. I am going to be there. By then I will have almost two full months of tracking a barbell based portfolio using MORL and REM as one side of this extreme investment approach. Today my imaginary barbell portfolio, 15% MORL, 30% REM, 50% XMI and 5% cash is up 6.73%. That means this portfolio of just more than $800,000 now sports $48,400 in unrealized gains and about $5840 in cash income.

If one had really put their portfolio into this oh-so-dicey portfolio, what would be the safe thing to do at this point? Should I rebalance at the first of each month and put any growth above inflation into a far safer investment? Should I try and bring a modicum of risk-aversion to the table? I'm going to stay the course until I collect the yield from another payday and then I think I will rebalance.

It is interesting to note that my solid TD Monthly Income portfolio paid about $1300 and I reinvested that income back into the fund. In reality this would be preformed as a DRIP. Backward testing has shown that removing the money needed to live every December is the best approach when one has a portfolio composed of only the TD Monthly Income fund.

My TD Rocking Chair portfolio, composed of a mess of TD e-funds, also delivered some dividends. The Canadian Bond Index-e paid out almost $1300, which was reinvested in the fund. I have not backtested the following but I am going to let the yield accumulate over the year and remove an amount to live in December.

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