Be A Control Freak

Ulli Uncategorized 1 Comment

Reader Don is looking to generate income and had this to say:

Do you think Master Limited Partnerships have a place in a retiree’s portfolio, looking for income? Thanks for your weekly musings on the market.

I don’t know anything about the partnerships you are considering, so let me comment in general based on my experiences. Most partnerships require you to tie up the invested amount, meaning that they may pay you a monthly rate of interest, but you can’t get access to your principal for a number of years.

If that is the case, the questions you need to ask yourself are the following:

1. Can you live with the fact that your assets are tied up for a certain period of time?

2. If the partnership runs into cash flow problems can you live without the promised monthly income?

3. Partnerships have been known to fail. What if this happens and you lose a portion or your entire principal? Can you live with that outcome?

If your answer is yes to all questions, by all means, do your due diligence and go ahead. If the answer is no to any or all of them, you better look for other opportunities.

To me, investing in an illiquid partnership (or any other entity for that matter) means you are giving up control. And lack of control with its unintended consequences can lead to more bad investments than a poor choice of stocks, bonds or mutual funds.

That applies to the selection of an investment advisor as well. Several clients of mine reported that they had their accounts with advisory firms in 2008 and watched their portfolios getting clobbered. The advisors refused to sell and, to add insult to injury, the clients had given up any rights to override the advisors’ decisions. Unbelievable, but true!

If you work with an advisor, be sure that you retain the option to correct any decisions he makes. You may never want to or need to use that prerogative, but make sure you have it.

If you invest in anything, make sure there is a liquid market place that allows you to get out at a moment’s notice. We are living in an era where some of the biggest hedge funds have failed (Bear Stearns) and you never know where the next Bernie Madoff may lurk.

You may very well live your life in a casual, relaxed, non-controlling and unassuming manner. However, when it comes to your investments, you need to turn into a control freak— and don’t let anybody sweet talk you out of it.

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Comments 1

  1. Hi Ulli,
    My parents held two Master Limited Partnerships; both were pipe lines, in their portfolio. They never had more than 10,000 dollars in either one due to rebalancing each year. These two investments complicated their IRS tax filing each year due to the timing of the statement mailings from each company. They could sell any time they wanted to but never did as the income was steady even though the value of the investment would vary. I also noticed that they held many stock and bond mutual funds of various types and from different companies. Never more than 10,000 dollars allocated to any one fund.
    MLP’s are expensive in IRA’s and complicate matters but in a non IRA account might be good in a normal market environment. In this environment the value of the investment could vary. Look at a chart of KMP for a reference.

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