The Progression of The Income Investor

Hello, YieldAlley readers! In this week’s newsletter:

• Rates Roundup for money market funds, brokered CDs, Treasury bills, and ultra short-term bond ETFs.

• Read of the Week: The Progression of The Income Investor

• Elsewhere: News around Warren Buffett, PIMCO, NVIDIA, and Reddit.

The S&P 500 reached a new high on Friday, driven by a broad rally. NVIDIA was the star performer in this last week, almost reaching a record valuation just shy of $2 trillion off the tail of a strong earnings report. Meanwhile, ten-year Treasuries rallied, with yields falling 0.08 percentage points to 4.25%. Short-term Treasury yields were largely unchanged.

Read our cash guides on Charles Schwab, Fidelity, Merrill Edge, Vanguard, and Robinhood to compare rates across money market funds and CDs to earn the highest cash rates.

The Progression of The Income Investor

One of YieldAlley’s big plans for 2024 is to cover all the different aspects and stages of income investing, from risk-free to high-yield, from beginner to professional.

We want to briefly outline the different stages of income investing, so you can begin to prepare yourself for the methods you want to implement. In future newsletters and on the website, we’ll dive into each level in more detail. The levels below broadly correspond to the experience of the investor as well as the risk level.

Level 0: Basic Savings

For the introductory investor. At this stage, you are beginning to earn income on your cash. You use bank CDs and high-yield savings products to park your cash. But, these come with liquidity constraints and are rarely the best-yielding options. The goal for these investors is to move to Level 1 as quickly as possible.

Level 1: Cash Investments

You realize that your cash can be put into T-Bills, brokered CDs, money market funds, and ultra short-term Treasury ETFs. These investments can generate 1 to 5% more annual yield than your current bank’s interest rate, at no additional risk. There’s virtually no downside to doing this (if concerned about safety, see our newsletter post about FDIC insurance). These investments are also where professional investors stash their cash to earn high yields with super-low costs.

Level 2: Cash Plus Investments

We move slightly up the risk ladder compared to pure cash investments, which are predominantly focused on Treasuries. In this stage, investors start to diversify into prime money market funds that, while still heavily invested in Treasury bills, begin to incorporate a larger share of short-term corporate bonds into their holdings. Additionally, this level introduces ultra short-term bond ETFs that are focused exclusively on short-term corporate bonds.

This shift not only aims to generate a higher yield for the investor but also marks the introduction of a new spectrum of risk, distinguishing it from the super-safe, Treasury-dominated investments of the previous level.

Levels 3 through 6: Intermediate Bond Funds and High-Yield Opportunities, Dividend Stocks

Here, the investor begins to dabble beyond short-term bond investments by buying municipal bond funds and intermediate bond funds (Level 3) to incorporate both an income and price appreciation strategy, commonly known as a total return strategy.

Depending on the investor’s risk appetite, they can invest in high-yield bond opportunities (Level 4) that generate a consistent annual income of 6% or more.

Convertible bond funds (Level 5) and dividend stocks and ETFs (Level 6) complete the investible universe that a proficient investor should analyze to have a well-rounded income investing strategy.

Levels 3 through 6 are where the income investor looks for opportunities to maximize income with minimal downside. Their goal is to understand how each investment type can generate income with as little risk as possible.

Level 7: Portfolio Management

Now, the investor looks at all the different types of investments mentioned above in a holistic manner. There’s a clear understanding of yields, income, and price appreciation strategies. Using the same set of investments, a well-constructed income portfolio that’s diversified and strategically rebalanced can outperform a poorly constructed portfolio. The investor finds ways to reduce risk through asset allocation and take advantage of certain beaten-down investments.

Conclusion

Does this sound daunting? Don’t worry. We’ll walk through each level throughout the year and showcase the natural progression of the income investor. Level 1 has already been covered in great detail with our Max Cash guides.

In the future, we’ll also introduce a “ride-along” newsletter that shows the behind-the-scenes of how the YieldAlley team manages its own portfolio. Income investing is meant to be passive. Our goal is to give you the tools and the knowledge to set up the foundation, and then forget about it. The challenge often lies in taking the initial step to establish this groundwork, which we aim to solve by taking you through level-by-level.

Warren Buffett is holding close to $160 billion in cash, which is mostly held in Treasury Bills. He also delivered a warm tribute to his late friend and partner Charlie Munger. PIMCO saw record inflows in its bond funds (which we will cover in depth). NVIDIA reaches a $2 trillion valuation. Reddit gets ready for its IPO. Capital One is buying Discover.

We’d love to hear from you. If you have any feedback or thoughts, please feel free to directly respond to this email with your message. Our ChatGPT bot is also available for your questions, as is our Facebook group.

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