Risk Free Income Portfolio

Discussion in 'Trading' started by vanilla2, Mar 24, 2004.

  1. My goal is to gradually reduce overall risk over time, as total capitalization grows. I'd like to slowly allocate capital to a risk free (or very low risk) income portfolio, parallel to higher risk trading activity. When total capital has enough mass to fulfill my risk free income goals, I will cease trading activities completely, having transitioned linearly from trading to annuities over time. This is still very (VERY?) far away, but I'd like to create a plan, and I assume plenty of the lurkers around have experience here.

    Can anyone recommend a current text about managing a risk free portfolio, or share an example of preferred structure? For example, is there a good reason to invest in fixed income funds, vs hand picking bonds? Are municipal bonds purchased via a broker, or directly from the municipality? What are your primary considerations for an income vehicle?

    Do you tend to keep a seperate income account, or leverage capital by mixing bonds and trading margin?

    Feel free to pm, would really appreciate any advice, or the chance to talk to someone who does this extensively. thanks
  2. Hi,

    A really nice goal, but you could be bored.

    There is no risk free alternative, but once you have gained enough you can bring the majority of your risks down by using proper money management (which is of course mandatory to get there at all:) ). I would never use funds because of the extra costs you have to pay, and more money is needed to fulfill your cash needs. You can easily opt for government bonds and just buy and hold them and make a basket of different maturities. Although to keep the price risk low I wouldn't take real long terms. But if it generates enough cash it might be worth it. Keep enough cash money for flexibility/opportunities. Spread among Real estate, Stock, Fixed Income, Cash.

    I think it is important first to focus on how to get there and once you get there, make sure not to loose your money. I think along the way you will have learned enough about money management that this question might just be answered by your experience.

    Good luck with your trading and hopefully you will reach your goal soon!
  3. vanilla,

    Forget annuities, ( unless you are selling them ) those are just bond funds with lowest yields and highest fees and restrictions.
    If you want to worry free income producing portfolio buy insured munis or investment grade corporate bonds. Treasuries have lower yield right now. I go strictly with tax free muni's because of my tax bracket.
    You will have to go trough bond broker and buy from their inventory as there is no public exchange. Commission should not be higher then 0.20% of the yield . Before you buy, ask for a sale history . Use money you will never need to touch because premium will fluctuate .
    Use www.investinginbonds.com as an educational tool and a price guide.
  4. There is no such thing as risk free. In exchange for security you sacrifice somewhere else; Interest Rate risk, Reinvestment Risk, Opportunity Cost, etcetera

    Therefore, portfolio management is about risk management. Risk, defined as chance of loss, can be reduced through diversification. The most popular form of risk diversification can be achieved through asset allocation. Modern Portfolio Theory suggests that 90% of portfolio returns are determined by where assets are allocated and not the individual assets which make up the asset class.

    These asset allocation models are as varied as the people who compile them. But simply, Stocks, Bonds, Cash. Some include Real Estate, Precious Metals, Commodities and all sorts of other asset classes.

    The percentage allocation into these three basic asset classes are determined by the amount of risk you are willing to assume, which can be determined by your time horizon, your goals and/or your stomach for loss.

    Using margin in these tables should be viewed as a negative cash balance. The percentages are academic, go to any broker's website and you can see what they advocate.

    As far as individual bonds versus mutual funds...
    A rule of thumb to use is whether you have more than $50k to invest and have a willingness to actively manage your bond portfolio, you should look to Individual Bonds. The management fees on bond portfolios and the chance of capital loss due to interest rate fluctuation is too high to use mutual funds. However with less than $50k, you are unable to achieve enough maturity, quality and interest rate diversification to outway the previously stated objections to mutual fund use.

    Good luck, hopefully you trade well enough into the future to use this type of information... until then... trade well
  5. lescor


    Preferred stock would be a good alternative to corporate bonds. They are traded on the major stock exchanges just like stocks. They usually have a face value of $25, so it's easy for the average investor to buy them. They pay quarterly or semi-annual dividends and are valued the same as bonds with ratings by the major credit agencies.
  6. genejef


    Hi, vanilla2

    There is not such a thing like RISK FREE PORTFOLIO, unless you are talking about CD or other bank instruments up to $100'000
    covered by FDIC.
  7. Source from another trading forum:

    Risk-Free Money with Grid Trading Forex

    Original idea:


    First of all kudos for roger for making us think outside the box.......i devolped the super high interest trading through his system and creativity.....so lets get started......

    1-open an account with marketiva, why? because they have accounts that do not charge interest or swap fees......i can start seeing the wheels turn.....or......open an account with F x c m and tell them you want to open a interest free account, you might have to tell them your muslim

    2-open an account with your regular broker, that charges regular interest........

    3-now, with your regular account open a long position with the gbp/jpy pair or any other interest positive so you collect interest everyday and triple interest on wednesdays....

    4-with your interest free account place a hedge/opposite trade on the gbp/jpy........

    5- be careful not to over leverage yourself, so you have enough time to switch money around if your margin gets a little high on one of the accounts......

    6-enjoy making free money!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!




    Before you venture into this method, even though the numbers seems attractive, there are several things you need to consider:

    1) Used margin = money used for position collateral at an interest-paying broker like O.a.n.d.a, or even I.n.t.e.r.b.a.n.k.F.X or any other broker with same positive rate of overnight rollover interest rate. Say $200, like the website says, with a 1-2% of overnight rate paid to us.

    2) Hedge margin = money used for hedging at a non-interest broker like F.X.C.M & M.a.r.k.e.t.i.v.a. This is used to keep your money from disappearing when the market goes against your position.

    3) Buffer margin = remaining money used to hold interest-paying position from getting stopped out when the market goes way far against us, more than th used margin would allow.

    4) Interest rate on leverage. From ElectricSavant's spreadsheet, best is to long AUDJPY at 1:50 which equals to 250% per annum of collateral margin without being compounded back. Yes, 250% wow!!!

    The scenario:
    - in order to profit from the interest, you need the interest-paying position to be active at ALL TIME, even though the trade goes against us in pip.

    - the best condition is when the hedge account blows up in the end (yes, zeroed!), as we have the market going our way along with the interest rate, all in the same account. this way we save the hassle of wiring the money back

    - the worst condition is when market goes to the hedged direction, especially before we get the chance to pile up on interest. That account gets fatter on pip differential, while the interest account drowns quickly (slowed by interest). In this scenario, we need to pump more money before it gets stopped out and stops the interest from flowing. Remember, pip move go faster than interest.

    - Let's do some math. If, for example, our interest position is long EURUSD and EURUSD dived 2000 pips like in 2005 (1.38 to 1.18), our $200 collateral in interest account would've gotten a margin call - unless we have more money than the collateral still available. How much? Well suppose on 1:50 leverage, 1 pip = $1, $200 can only sustain a 150-pip negative swing. U need to stock up for the 1850-pip remaining.

    $200 on 1:50 lev = $10K position (roughly) at $1/pip = -150 pips before a 25% remaining margin call. If we were to sustain a 2000 pip drop this year (or may study from annual movement range statistics), we need to supply $2500 more in the interest account.

    OK. Now pay attention.

    $200 for interest collateral (O.a.n.d.a/ I.n.t.e.r.b.a.n.k.F.X /etc.)
    $200 for non-interest hedge account (F.X.C.M/M.a.r.k.e.t.i.v.a/etc.)
    $2600 for interest account margin buffer (or for non-interest account, incase market goes the other way)
    $40 x 2 account withdrawal fee = $80 (fixed cost), may be more if we need to juggle margin by transferring between account but provide less margin buffer - dont forget time needed for wiring money! It needs to get there in time before position gets liquidated by broker.

    $200+$200+$2500+$80 = $3000
    250% of $200 = $500
    $500/$3000 * 100% = 16% roughly ... where did that 250% pa go?

    - another scenario, where we reinvest everyday to increase the interest riding position like in the website. Well, you'll need to hedge the same amount to your non-interest position as well. So, you may appear to have more money, but unfortunately, u need to provide the same amount to hedge it with.

    I'm not saying that it doesn't work. It does, and it should. But it's really not as attractive as you think and you need to juggle the margin manually. Perhaps better for conservative fund management growth rate or banking in the fixed income sector (25% or less annually), but not attractive for small capitals who looks for 50% or more per quarter.

    However, the good side: you cant lose. Just think of the broker as another banking facility.