After graduating from college and completing 6 years in the Air Force, I was interviewed and hired by Dan Tully. That began what would become my 30-year career with Merrill Lynch,
Because I was going to be located in a very affluent part of the country which had a lot of investors in high tax brackets...and who paid high state and city income taxes...I decided to deal primarily in tax-free municipal bonds.
Interest rates were high during this period, with "munis" sometimes offering double digit TAX-FREE yields. In states and cities with income taxes, these bonds were often more attractive than stocks, which historically only provided an average return of around 10%...TAXABLE.
Over the years, this specialty...and the wealthy investors I was exposed to...led to the clientele at the left.
Occasionally, however, some of these bond clients would want to get involved in the stock market!
There have been numerous studies and reports over the years which confirm that the vast majority of investors...including the "pros" and their managed funds...continually fail to "beat the market":
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Standard & Poor's (S&P)/Dow Jones tracks and reports on that performance every 6 months:
The SPIVA Report
"The SPIVA Scorecard"
Also, S&P shows that a fund doing well in one year has ALMOST NO CHANCE of remaining even in the top HALF of funds over the next 5 years.
"The Persistence Scorecard"
"Mutual Funds That Consistently Beat the Market?
Not One of 2,132"
...NY Times
"The Stock -Pickers' Market Myth"
...Burton Malkiel
Barron's "Experts"!!
The Danger of Listening to "Experts"
(Jim Cramer goes down in flames!)
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Anyway, a better way had to be found to avoid losing good bond clients if there was a bad year in the stock market!
Index funds weren't the answer, because while they would beat the vast majority of stock-picking strategies, as indicated above, they would still lose in a bear market...because they ARE the market!
What was needed was a way to own the S&P 500, but without the downside risk!
This led to a strategy using TREASURY BILLS AND S&P 500 INDEX OPTIONS which could accomplish the following:
If the S&P 500 increased during the year, the client would capture most or all of that increase.
If the S&P declined, or even crashed, the client would lose little or nothing.
For example, if the client invested $100,000 in the T-Bill/option package...say $90,000 for $100,000 face amount of 1-year T-Bills** and $10,000 for the options... and the S&P 500 Index increased, say, 15% during the year, the package would be worth around $115,000 at year end.
If the S&P declined or even crashed, the package would still be worth close to the original $100,000.
This was something that no traditional investment managers were offering to their clients !
The key was that the interest earned on the T-bills would cover the cost of the options, and the T-bills would mature at their face value of $100,000
The investor couldn't lose!
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But all of that was back in the period of much higher interest rates. Although rates have increased a lot from a low base in the last few years, they are still well below the levels which made things work perfectly back then.
(See the US Treasury Yield Curve)
However...the strategy can still be successfully used by tweaking the index option part of the package to generate some additional cash during the year.
Details: cyberterrys@hotmail.com
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Anyway, it was a wonderful career, but after 30 years, I retired from Merrill Lynch at the age of 58.
The bull market in bonds continued for many more years.
Dan Tully, the smiling Irishman who hired and mentored me...and who many considered to be the greatest CEO in the firm's history... died in 2016.
RIP
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Jim Terry
** T-Bills are issued at a discount and mature at par, the difference being the stated interest.
Note: Neither Bank of America nor any of ts subsidiaries are responsible in any way for the content of this website.
Note: I am retired and no longer a registered investment advisor.
Disclaimer: All of the information above is presumed to be accurate, but cannot be guaranteed. Please don't invest using ANY strategy without consulting with your financial, legal and tax advisors.
