Friday, December 26, 2008

Managing Risk in an IRA: KTN and KVW

For a retirement account, I try to manage risk in several ways.  The following is a description of one way that I have been managing risk for a small position in AON TCs contained in my regular IRA account (the large position is in a taxable account).  The following discussion assumes some familiarity with these two securities.  

Both contain the same underlying junior debenture issued by AON, but KTN has a slightly higher coupon at 8.205% whereas KVW's coupon is 8%. Actual yields will vary based on the price for the security.  Due to occasional pricing discrepancies, one may be a better buy than the other at any given point in time and that may present an opportunity to manage risk.   In this IRA, for example, I sold 50 of KTN for over a $100 profit in mid September, at around 21, and then bought 50 of KVW at close to 16.  So in effect, I lowered my cost and increased my yield, while netting a small profit.  During one of the meltdowns, I added in this account 50 KTN at less than 14. GRTPRF: A WALK ON THE WILD SIDE/ KTN add
At that point, I have 50 KTN and 50 KVW which is an over-weight for this 1 bond in that account.  I mentioned in an earlier post that the intent was to sell KVW and hold onto KTN.  I sold the 50 KVW this morning at 17.55 for a small profit.  But now I have the higher yielding KTN bought at price  $2 lower than KVW.  So, once again, I lowered my cost basis, which reduces my risk, and increased my yield for the AON TC in this account.  Now, I have realized two profits for this bond in TC form in 2008, lowered the amount of money exposed to it, an increased my yield to the highest level yet with the last purchase. Both KVW and KTN go ex dividend tomorrow.  This is irrelevant for securities held in an IRA, since interest, short or long term capital gains, dividends, long term capital gains distributions are immaterial or irrelevant events for tax purposes of course.  For the regular IRA, as we all know, only a withdrawal is taxed and the withdrawal is taxed at ordinary income rates after 59 1/2 irrespective of the nature or category of income received while the money was still in the regular IRA, with many rules to keep track of these days, so I am just talking generally Publication 590 (2007), Individual Retirement Arrangements (IRAs).Retirement Plans FAQs regarding IRAs Time for an IRA Distribution? - 2007-2008 - The taxation of withdrawals in a regular IRA is one reason why I did several partial conversions to a Roth IRA this year when the valuations of certain securities in the regular IRA suffered substantial drops in price. Weekend News 10/ 25-26/ 2008 Sunny and Dark at the Same Time So it does not help to receive long term capital gains as opposed to interest and short term capital gains in these retirement accounts. Thus, the only considerations about buying and selling in the KTN/KVW swing trade are the brokerage commissions, lowering my cost basis on 50 shares, and increasing my yield.

For managing the AON TC position, I will keep the 50 KTN bought at less than 14 until (1) I become concerned about AON's credit or (2) I can lower my cost and increase my yield with the kind of trades that I have been doing.  I can look at the pricing of 4 Aon TCs do accomplish this task, KVW, KTN, DKK, KVF.  None are likely to present an opportunity to lower my cost and increase my yield over the existing position in KTN anytime soon.      


  I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. In these posts, I am acting as an unpaid financial journalist and an occasional political commentator.   I am also aggregating financial news stories that I view as important and providing any reader of these posts, assuming there are more than a couple, with links to those articles, sort of a filtered, somewhat intelligent, free search engine.  Any discussion made by me of particular securities  is not a recommendation to buy or to sell.  Trade at your own risk.  Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons.  The sale may before or after the post.  Before buying or selling any stock, even one recommended by a trusted financial advisor,  please research it and make up your own mind which is what I always try to do.  Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news.  In this post, and all others by me, I am merely describing my reasons for purchasing  or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale.  The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile.  Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments.  Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed.  These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities.   All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me. 

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