Recently, I noticed a growing chorus of analysts putting forth a disturbing message.
They said that sky-high tech valuations are justified … this time is different than the late-1990s tech bubble.
To paraphrase Sir John Templeton, “this time is different” are the four most dangerous words in investing.
And right on cue, the tech-heavy Nasdaq Composite Index dropped 11%.
Some stocks have fared much worse, with Apple Inc. (Nasdaq: AAPL) down as much as 20%.
But that has barely dented valuations, and shares of the tech giants are still priced for perfection.
And that’s despite plenty of uncertainties looming on the horizon: the election … a resurgent pandemic … need for more stimulus … the list goes on.
That’s why smart investors book profits from this year’s rally … and build a portfolio designed to generate a lifetime of endless income.
Here’s how to be smart in this volatile market.
Make Your Money Do the Hard Work
In our Your Money Matters video this week, Ted and I discussed what it means to achieve financial freedom.
Sure, it feels euphoric to score a big win in the stock market. And it’s OK to speculate with a small portion of your portfolio.
But constantly swinging for big gains with all your capital is a recipe for disaster.
Instead, you should also cash in your speculative gains along the way, and use those profits to build a portfolio of income-producing stocks.
That’s how you achieve true financial freedom. That’s how you make your money work for you.
And when it comes to income, it’s a good idea to diversify your income stream.
Ted and I have already written in Bauman Daily about how to grow your yield on cost and how to spot the best dividend-paying stocks.
Now I want to share another way to generate huge payouts … over eight times what you can receive on measly Treasury yields at the moment.
Yet it’s also a type of security that is safer than stocks.
In fact, these securities were a great place to preserve your capital and generate huge payouts during the last tech bubble.
And that’s why now’s the perfect time to make these investments part of your portfolio.
Why You Should Buy This ETF — in 1 Chart
I’m talking about preferred stocks.
They’re unique because preferred stocks combine features of both debt and equity securities.
Preferred stocks trade on an exchange like common stocks, but pay a coupon like fixed-income securities.
They are riskier than traditional bonds because they’re behind bonds in the line to be repaid should a company go bust. That’s also why they usually pay a higher yield … to compensate you for the extra risk.
But preferred stocks’ place in line is ahead of equity holders, so they’re safer than common stock.
This means preferred stock prices usually don’t go through the same ups and downs that common stocks do.
In fact, a measure of such price volatility shows that preferred stocks are about 40% less risky than stocks.
That was on full display during the bursting of the last tech bubble. Preferred stocks tracked by this broad index gained nearly 40% during the last bust at the start of 2000 through 2002, compared to the S&P 500 Index’s 38% decline:
That’s why you should take a look at the Global X U.S. Preferred ETF (NYSE: PFFD). It’s an exchange-traded fund (ETF) that holds preferred securities across a variety of sectors.
It currently yields 5.5% and pays monthly distributions. From a fee standpoint, PFFD’s expense ratio is less than half compared to other preferred ETFs.
As the “this time is different” chorus picks up, use preferred stocks as part of your plan to preserve capital and generate endless income.
Research Analyst, The Bauman Letter