Most people are unfamiliar with the investing term “carry”.  Carry is simply the cost or benefit of owning an asset.  Bonds have a “positive carry” since they give you periodic coupon payments.  All things being equal, bonds pay you to own them.  An asset like crude oil may have a negative carry if you include transportation and storage costs.  Positive carry means you are being paid to own an asset – negative carry means you pay to own that asset.  The longer you own an asset the greater carry plays a role in returns.

Many investors do not have to worry about carry within their portfolios.  Many stocks, equity indexes and bonds have positive carry.  For instance, the $SPY index fund tracking the S&P 500 benchmark has a positive carry of about 1.7% per year*.  This means that if the price of $SPY finishes 2018 at the same price as it started the year, you should still be richer to the tune of about 1.7%.  An internationally diversified portfolio of stocks and bonds should have a positive carry (yield) of over 2% per year (as of January 2018).

To understand carry, it pays to have information.  How much does your portfolio yield?  What are the expenses (average expense ratio) of your holdings?  Once you have this info its easy to figure out your carry (yield minus expense ratio).  I often see portfolios of potential clients that have a yield under 1% but an expense ratio over 1% – meaning they have a negative carry.  This does not necessarily make the portfolio “bad”, but it’s not a great start.

It’s really important to be on the lookout for holdings in your portfolio with negative carry.  Shorting a stock, bond or ETF has a large negative carry.  Purchasing commodities, leveraged ETF’s or volatility products may have a negative carry.  High expense mutual funds or ETF’s can also have a negative carry.  “Alternative” mutual funds like long/short funds and market neutral funds can have a negative carry.

Having a negative carry certainly does not ensure you will lose money, but it is a hole your portfolio will have to dig out of each year.  Having a positive annual carry, including advisor fees and fund expenses, is easily achievable.  A great financial advisor, charging a reasonable fee, should be able to build you a well-diversified portfolio with low fund expenses.  Having a portfolio with a positive carry can go a long way to helping you achieve your financial goals.

*As of 1/22/18 –

**The above article is informational in nature only and is not a recommendation to buy or sell securities.  All information is gathered from sources believed to be reliable, but neither Charles Brown nor Ausdal Financial Partners, Inc guarantees the accuracy of the information.  All investments carry a degree of risk.  Individuals should consult with their tax and investment professionals before making changes to their investment portfolios.

***Securities and Investment Advisory services offered through Ausdal Financial Partners, Inc, 5187 Utica Ridge Road, Davenport, IA 52807 (563)326-2064. Member: FINRA/SIPC. M.Brown and Associates and Ausdal Financial Partners are independently owned and operated