Mullooly Asset Show Episode 46 Transcript

Tom Mullooly: In Episode 46, we’re going to talk about one of my favorite acronyms, KISS, Keep it Simple, Stupid. Welcome to the Mullooly Asset Show. I’m your host, Tom Mullooly, and this is Episode 46. We’re almost halfway to 100. See, now that I’ve said that, now we have to do 100 videos at least.

We get great questions every week from our clients, from our listeners, from people who just find us through the web. If you’ve got an investment question or a financial planning question, get in touch with us. You may see it on a future video, and we appreciate everybody tuning in. If you’re watching this on YouTube, make sure to hit that subscribe button down below. Tim, what are we going to talk about today?

Tim: I’ve been looking for more yield. Rates are so low. My broker suggested something called a “senior loan portfolio”, but I’ve never heard of anything like that. What do you know about it?

Tom Mullooly: There are so many things that we can talk about with a question like that. The first thing I want to just mention is the first part of the question was rates are so low. Rates are relative. They’re always relative to the rate of inflation. You know, back in the early ’80s when rates on bank investments were in the double digits, it’s because inflation was almost as high. So once you take out the rate of inflation, the real net return to you is probably going to be 1 or 2%. Don’t worry that nominal rates are as low as they are.

I want to talk about something else, okay? So the question that came in talked about senior loan portfolios. I have to confess, I’ve been in the business for 30 years. The first 10 years that I was in the business, I never heard of a senior loan portfolio, never heard of it. So these were loans that were short-term, that are issued by companies. They don’t make it into a junk bond portfolio. They’re not publicly traded or listed debt securities. They’re just pooled loans.

So there’s a lot of unknown about these things, and brokers got sold some … These are products that brokers can sell to clients. I got some really good advice when I was a baby broker back in 1986. I sat down in my branch, what they used to do, when you were a new broker, is you would spend half a day with one of the biggest producers in the office.

You learned some good things, you learned some not so good things, but there was a whole lot to learn. There’s a million ways to build a business as an investment advisor or a broker. One of the advisors that I sat down with, huge producer in the office, this guy named Marvin, great guy. He gave me some great advice, never forgot it.

He said, “Kid, don’t buy things that you get paid a lot of commission on. They’re not any good for you. You’re going to get paid, but ultimately they’re not very good for you. They’re not very good for your clients, and you’re going to have to wind up finding new clients once they get stuck with these terrible products,” because that’s what they are. They’re products.

He said, “The best thing you can do for your clients, just buy individual stocks and individual bonds.” Today, I would include exchange-traded funds because they’re the cheapest way to get a diversified basket of stocks or bonds into your account, and they’re cheap. So they’re very efficient for clients to invest in, but stay away from these products, I can’t stress that enough.

One of the stories, totally unrelated to this question, that came in over the weekend, one of the largest commercial real estate companies in the world just crapped out on a senior loan that they had in their portfolio. So if this huge real estate company has defaulted on a loan, $380 million worth of senior loans, they’re not going to pay interest on, whoever owns those senior loans is going to get nothing for their investment.

If you own that in a portfolio, you’re going to lose money. That’s just the way it is. It’s not like these things can go up when interest rates move in another direction. It’s really designed for income. I don’t want to make this too complicated. That’s the whole point behind this video and this question today is, keep your investments simple. That’s all you need to remember.

If you own individual stocks, if you own individual bonds, if you own exchange-traded funds, you’re doing great. You don’t need to get involved in alternative investments. You don’t need to get involved in some of these other really complicated things. It is not worth it.

Just one last thing I’ll say. If some of those investments were so great, the companies that brought them out would keep them for themselves if they were that good. They don’t have to sell them to you, and you shouldn’t buy it either. Thanks for watching Episode 46. Don’t forget to subscribe if you’re watching on YouTube. Look for us in Episode 47. See you.

 

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