Bequeathing Assets and Inflation by Malcolm Berko on Creators.com

Recently

Stolen Wallet Leads to a Huge Headache Dear Mr. Berko: My wallet was stolen a year ago, and most folks have no idea what a job it has been to get my life back in order. The credit agencies have me listed as a bum, even though I pay all my real bills, and I still get calls from vendors …Read more. Kick That Broker to the Curb Dear Mr. Berko: We are 74 and 76. We've used the same broker since early 2002, and our account, which was worth $765,000 back then, is barely worth $705,000 today. Our mutual funds haven't done well, and we've lost money in various unit trusts. Our …Read more. Would the Real Malcolm Berko Please Stand up? Dear Mr. Berko: What stock exchange firm do you work for? Is it true that you accumulate a big holding of a stock for all of your clients and then write good things about that stock in your newspaper column so that millions of investors will read …Read more. Natural Gas Firm Looking Like a ‘Buy' Dear Mr. Berko: A long-time friend of mine (name omitted) who says he knows you well has had some good successes in the market during the past six years buying oil and gas limited partnerships, high-yielding convertibles and preferreds. He just …Read more.

Bequeathing Assets and Inflation

Dear Mr. Berko: My brother insists that interest rates and inflation will change little in the coming few years and has recommended that I purchase his firm's three-year CD that pays 1.85 percent. Assuming that he is right — and he has convinced me and my son that he is — do you think this is the best rate available? I'm 87, have $240,000 in cash and want more income, but also want to limit my exposure as much as I can so I can leave my son as much of my assets as possible. Please advise me with your usual candor. — S.T., Punta Gorda, Fla.

Dear S.T.: I think your broker may be spending too much time in the Bozone layer. This is the atmospheric layer where the accumulation of molecular gasses surrounds certain stockbrokers shielding their brains so they can't recognize their stupidity ... there are quite a few investors in the Bozone layer, too.

Brokerage house CDs are often the lowest-paying CDs you can own. Frankly, you can purchase three-year CDs all day and get between 2.55 percent and 2.85 percent. In fact, you can get 2.85 percent from Atlantic Coast Bank, which is a full 1 percent higher than that brokerage CD, and it will pay you $2,440 more each year for three years. Bank CDs almost always pay more than brokerage CDs because the brokerage firm usually pays your broker a 2 percent commission (a sweet $4,800 in your case) and the brokerage keeps the 1 percent spread.

I understand your desire to leave as much of your assets as possible to your son, but holy Zeus and Zachariah, your first duty is to yourself. I don't know the value of your other assets, but sometimes parents play it closer to the vest than necessary and short change their remaining years to leave as much to their kids as possible. Does this sound like you? Please be mindful that you don't owe your son a darn thing except love.

Now, I'm certain as Satan is sin that this brokster is wrong. And I'm willing to wager my award-winning secret Blue-Ribbon Texas Chili recipe (no beans) to 10 pounds of ground beef that interest rates and inflation three years hence will be a heck of a lot higher than they are today.

I won't detail my reasons, but suffice it to say that many of the suits on the Street and the Fed think so, too. Did you know that the 30-year Treasury bond yields 4.65 percent? And if rates remain the same three years from now, as your broker believes, why wouldn't your brokster recommend a $240,000 purchase of those treasuries? So if rates are the same in March 2013, just sell the Treasury bonds at the price you bought them, earning $11,160 a year instead of $4,500. But he won't buy treasuries because the commission is a dinky $100.

Here are my recommendations: Invest $140,000 in the Atlantic Coast Bank three-year, 2.85 percent CD and the remaining $100,000 as follows: Put $25,000 in First Trust/Four Corners Senior Floating Rate Income Fund (FCT — $11.88). This closed-end fund owns a $477-million leveraged portfolio of adjustable, secured corporate loans and trades at a 14 percent discount to net asset value. The .029-cent monthly dividend yields 3 percent. Invest $25,000 with ING Prime Rate Trust (PPR — $5.41). PPR has a $1.1-billion leverage portfolio and trades are a 4 percent discount. The portfolio is composed of senior secured floating-rate loans and its .025-cent monthly dividend yields 5.5 percent. Finally, place $50,000 in Nuveen Senior Income (NSL — $7.19), which pays a .04-cent monthly dividend and yields 6.7 percent. NSL's $197-million leveraged portfolio consists of secured senior floating-rate debt. NSL trades at a 6.2 percent premium to net asset value.

If rates remain stable over the coming three years, as your son believes and as your broker insists, then the value of these three closed-end funds will remain unchanged. But if rates rise, even though the interest rate on the above portfolio holdings will rise, you could have a modest principle loss of $2,500 to $3,500. Still, it sure beats the heck out of a lousy 1.85 percent, three-year brokerage CD. The above portfolio will provide you with $28,395 in principle interest income over the next three years. And if you lose $3,000 in principle, you will net $25,395, which is a 4.1 percent current return.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.