Bill Gross is Wrong: You CAN Earn More than 5% Per Year

One of the world’s top investors is dead wrong.

“If you can get long-term returns of 5 percent from either stocks or bonds, you should consider yourself or your portfolio in the upper echelon of competitors.”

That’s what Bill Gross, CEO of PIMCO, wrote earlier this week.

And the “Bond King” is right — most investors will be lucky to achieve 5% returns in the economic malaise, which will accompany global deleveraging and economic destructiveness of financial repression.

But you don’t have to stand for mediocre returns…

There are some investments that are perfect for this type of market.

Here’s one of the best that earns bigger profits with less risk in markets like this.

Ready, Set, Go Nowhere

Back in August, I warned Freedom and Capital readers: “We’re stuck in a ‘go nowhere’ market.”

Since then, the markets have gone nowhere. And it’s reasonable to expect a long and windy road over the next one, two, even five years that ends up right back where we are today.

The ever-widening market swings have only caused an increasing number of investors to join Gross in lowering their expectations.

Just look at the yields on Treasury Inflation Protected Securities (TIPS)…

These are U.S. government bonds indexed to inflation. The yield on three-year TIPS is negative 1.09%.

That means investors expect such poor performance, they’re willing to accept a guaranteed loss in order to avoid much bigger losses. It’s crazy. But given the recent market volatility, building inflation, and everything else, it’s understandable.

Meanwhile, this volatile ride is perfect for one investment strategy that turns volatility into profits (and below, I reveal an easy trick to it — it’s as easy as buying a regular stock).

More Profits, Less Risk

The holy grail of any investment is big gains with low risks.

This is even more important today, with risks around every corner…

There is one strategy that actually turns risk into your advantage. It’s called covered call writing.

This strategy involves buying a stock and writing (selling) a call option against the position. By writing a covered call option against your stock position, you’re getting an upfront payment (the premium) and giving someone else the option to buy your shares from you at a predetermined price.

If shares go up, you miss out on the upside. But if shares are flat or go down, you pocket the premium.

The end result: more gains with less risk.

A study by Callan and Associates found this strategy has a long history of great performance with significantly less risk.

The image below from the study compares the CBOE S&P 500 BuyWrite Index (the main covered call option writing index) to many other asset classes:

(click chart to enlarge)

As you can see, the covered call strategy beat the S&P 500, Russell 2000, emerging markets, bonds, and T-bills between 1988 and 2006…

And it did it all with much less risk (standard deviation).

Of course, the 18-year period studied was a major bull market that only comes along once in a lifetime.

Since then, the strategy has continued to prove it’s worth in one of the most volatile markets in history.

Since 2006 the CBOE S&P 500 BuyWrite Index is up 20%, while the S&P 500 is actually down.

On top of that, when the markets collapsed in 2008, the lowest drop for the lowest point for the BuyWrite Index was a mere 27% while the S&P 500 was cut nearly in half.

Once again: more gains, less risk.

Of course, isolating a stock, finding which options series to write, analyzing the delta and gamma for the options, executing the trade, and doing it across a basket of 15 to 30 individual stocks and options can take a lot of time…

But there’s a way to benefit from covered call writing with less time — and earn greater gains and reduce risks even more in the process.

Best of Both Worlds

One of the most appealing investments throughout this summer’s downturn has been a rare investment that most investors never consider.

Back in August when the markets were collapsing, I wrote an article entitled, “If You’re Buying Stocks, You’re Making a Big Mistake:

One of the most little-watched corners of the markets is Closed-End Funds (CEF) — and for good reason.

CEFs are funds that trade like normal stocks. They usually contain a broad basket of stocks or bonds or engage in a unique investment strategy. But they usually tend to move up and down with the overall markets.

In short, CEFs are normally terrible buys.

The past week, however, has been anything but normal. And it’s created one of the rare times when CEFs outperform stocks in general.

Since then, CEFs have outperformed overall. A few have done even better.

One of those few areas of the CEF universe has been the BuyWrite class of CEFs.

These are CEFs that do all the work of covered call writing for you.

And since they’re CEFs, you can buy them when during periods of uncertainty (like right now) at significant discounts to what they’re worth.

There are many advantages: In this case, they find the stocks, write the options, collect the premium, and generally trend higher as the market falls or goes sideways.

And since they’re CEFs — and are still out of favor — you can buy in at a 10% to 15% discount Net Asset Value (NAV).

It’s the equivalent of buying into one of the world’s safest and most profitable investment strategies for 85 cents on the dollar.

At the time I recommended my top CEF pick to Freedom and Capital readers back in August, I explained how it uses covered call writing to outperform the markets with much less risk.

It was almost too good to be true. In addition to the benefits of covered call writing, we were able to get in for about 85 cents on the dollar and collect an 11.3% annual yield.

And the best part: It will only do even better as market volatility continues.

Join the Upper Echelon Now

It was one of the few “holy grail” investment opportunities in the markets — and it would never have been available without the fear and anxiety most investors are feeling.

There will be many more. You just have to know where to look.

Sure, Gross and many other commentators can “give up” and accept 5% returns for years to come. And still more investors are willing to accept guaranteed losses on TIPS…

But with strategies like covered call writing and CEFs, you don’t have to.

And better yet, you don’t have to take big risks to be in the “upper echelon” of investors, either.

Good investing,

Andrew Mickey
Editor, Wealth Daily