Submitted by The Investment Shadow
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Income Investing: News, Information, Opportunity
Whoa! Stop! Hang on a minute. There is absolutely nothing scary about falling income security prices. There is nothing to be particularly concerned about or afraid of. Relax, take a few deep breaths, and read on.
The future fall in income security prices is all the buzz in the financial media these days, but why does this translate into such fear and confusion? I saw a news report the other day that encouraged investors to abandon their income ship and sail away on a stock market steamer that has been cruising steadily higher since March 2009!
And lest we forget, the over-riding purpose of investing in income securities is, drum roll please, the generation of income. That's income, Alice, not growth in market value. Just income.
Income securities, as measured by an index of high quality closed end funds (CEFs), are roughly 65% above where they were at the bottom of the financial crisis and, more importantly, precisely within their normal price range of the past twelve years. The most conservative CEFs are yielding from 5.5% tax-free to 7% taxable.
There are reasonable explanations for recent price volatility --- there are excellent reasons why investors should be viewing all price weakness as a buying opportunity. Clearly, the financial press has not attended any of my income investing seminars. Lower prices and higher yields are good news for income investors!
One: Income security prices vary inversely with interest rate expectations (IRE) --- freshman finance. After several years of historical (hysterical) lows, the world expects interest rates to rise during the next few years.
Two: Rising IRE, regardless of its impact on the price of fixed income securities, has absolutely no impact whatsoever on the income generated by existing securities. In fact, in CEFs, it will eventually lead to higher payout levels when managers have access to higher yielding instruments.
Three: The surging stock market has outsmarted most mutual fund managers, and rather than look stupid by holding income securities, they are taking losses in that area and "window dressing" their portfolios with equities that MCIM (Market Cycle Investment Management) investors are taking profits on.
Inexperienced investors too, much too often, move from income to equity at precisely the wrong time.
Four: Rumors about the weakness of individual state treasuries may lead to some downgrading of their bond offerings, and this certainly has added some pressure to municipal bond pricing --- but there hasn't been a significant Municipal Bond default since the WHOOPS fiasco of the early 1980s.
CEFs contain hundreds of different issues, and defaults are not likely to occur when so many other fiscal alternatives are available. Perhaps the state employee unions will be forced to weaken their stranglehold on private sector worker pocketbooks.
Five: As any MCIM practitioner would explain, income CEFs have been a bountiful landscape for profit taking as they rebounded from the price "haircut" of the financial crisis. By adding to positions during the 24-month decline, profits were quick to appear as prices rose to normal levels --- profit taking has been replaced by other investors' irrational loss taking, as CEF income continues unabated.
Six: Recent speculation that Congress would raise income taxes led to increased demand for tax-free securities. Now, with that nearly certain, demand may increase again.
Seven: CEFs, and the securities they own, are much less liquid than equities. Consequently, when there are more sellers than buyers (for whatever reason), prices will fall more quickly --- but the impact on income? Nadda.
Eight: During December and January each year, most CEF managements disburse their accumulated capital gains. This welcomed "bump-up" in income to investors is recorded in the market as a reduction in price as the cash is distributed to shareholders.
So now you know why closed-end income fund prices, particularly for tax-exempt issues, are where they are today --- roughly 20% below their highest levels ever, and begging for your attention. I look at it as a double Holiday bonus (or "gelt", for those of you who know).
Whether it is profit taking by MCIM aficionados, or loss taking by window-dressers; whether it is irrational "priceaholism" or simple issues of supply and demand --- history tells us what to do about it.
When prices rise, we take our profits, reinvest and increase our cash flow. When prices fall, we reinvest our unaffected (even increased) earnings, reducing cost basis while increasing yield on investment. Double your holiday pleasure with increased distributions and lower priced shares to choose from.
Have you ever had so much fun? Who says income investing is boring!
Retirement Ready Income Programs
2971 Maritime Forest Drive
Johns Island, SC 29455
Phone (800) 245-0494 • Fax (843) 243-8509
Contact Steve directly for additional information: 800-245-0494
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|Please read this disclaimer:|
Steve Selengut is registered as an investment adviser representative. His assessments and opinions are purely his own. None of the information presented here should be construed as an endorsement of any business entity; the information is only intended to be educational and thought provoking.
Risk Management: Income, 401k, and IRA Programs
Take a tour of a professional investment managers' private SEP IRA program during ten years surrounding the financial crisis:
In developing the investment plan, personal financial goals, objectives, time frames, and future income requirements should all be considered. A first step would be to assure that small portfolios (under $50,000) are at least 50% income focused.
At the $100,000 level, between 30% and 40% income focused is fine, but above age 50, the income focus allocation needs to be no less than 40%... and it could increase in 10% increments every five years.
The "Income Bucket" of the Asset Allocation is itself a portfolio risk minimization tool, and when combined with an "Equity Bucket" that includes only Investment Grade Value Stocks, it becomes a very powerful risk regulator over the life of the portfolio.
Other Risk Minimizers include: "Working Capital Model" based Asset Allocation, fundamental quality based selection criteria, diversification and income production rules, and profit taking guidelines for all securities,
Dealing with changes in the Investment Environment productively involves a market/interest rate/economic cycle appreciation, as has evolved in the Market Cycle Investment Management (MCIM) methodology. Investors must formulate realistic expectations about investment securities--- by class and by type. This will help them deal more effectively with short term events, disruptions and dislocations.
Over the past twenty years, the market has transitioned into a "passive", more products than ever before, environment on the equity side... while income purpose investing has actually become much easier in the right vehicles. MCIM relies on income closed end funds to power our programs.
To illustrate just how powerful the combination of highest quality equities plus long term closed end funds has been during this time... we have provided an audio PowerPoint that illustrates the development of a Self Directed IRA portfolio from 2004 through 2014.
Throughout the years surrounding the "Financial Crisis", Annual income nearly tripled from $8,400 to $23,400 and Working Capital grew 80% $198,000 to $356,000.
Total income is 6.5% of capital and more than covers the RMD.
Managing income purpose securities requires price volatility understanding and disciplined income reinvestment protocals. "Total realized return" (emphasis on the realized) and compound earnings growth are the key elements. All forms of income secuities are liquid when dealt with in Closed End Funds.
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|Please read this disclaimer:|
Steve Selengut is registered as an investment advisor representative. His assessments and opinions are purely his own and do not represent the views of any other entity. None of his commentary is or should be considered either investment advice or a solicitation of business. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be or should be construed as an endorsement of any entity or organization. The reader should not assume that any strategies, or investments mentioned are any more than illustrations --- they are never recommendations, and others will most certainly disagree with the thoughts presented in the article.