Retirement Ready Income Programs

The Working Capital Model - Part 3

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I know of no other Investment Manager anywhere (other than those who have contacted me and obtained my consent), private or public, that uses the "Working Capital Model" to direct individual investor portfolios --- certainly none of the major operators, who are dependent for their survival upon the whim of large "others".

The following is a slightly edited excerpt from Chapter Four of: "The Brainwashing of the American Investor":

"Now I realize that this approach is totally different than anything you’ve ever dealt with before, but in one fell swoop it surely eliminates all of those nagging ifs, ands, and buts, that make standard "bottom line" "market value" analysis totally useless (to the investor).

I created the "Working Capital" method of performance evaluation many years ago (1975), when it became evident that a trading strategy was quite a bit different from most styles of management. It shows you where you are and allows for meaningful comparisons with where you’ve been. As a "kicker" it allows for an instant and accurate appraisal of asset allocation. 

Working Capital is defined as the actual Cost Basis of the securities in the portfolio; not their current market value. This concept is consistent with the retail store approach towards equity investing which was discussed earlier. Income of any kind, including realized capital gains, and deposits increase your working capital while withdrawals and realized capital losses alone decrease it.Current market value is not a factor.

Since you will constantly monitor the age of the securities in the portfolio the tendency to hang on too long to nonproductive assets is also avoided. The total "Working Capital" will always be more than the Market Value of the portfolio, unless the bulk of the portfolio is invested in fixed income securities. (AND then only if interest rates have moved down since the time the Fixed Income securities were purchased.) This is both expected and accepted because it is easy to understand without having to sift through a dozen research reports that try to explain an array of "unknowables" about the economy and the company’s Management Team.

However, the closer the "broad" market gets to truly high ground, the narrower the difference between working capital and market valuations. Is this clear? Working Capital doesn’t change as a function of market value. It grows through the addition of cash from deposits, dividends, interest, and realized gains. It decreases when losses are realized and when cash is withdrawn from the portfolio. The day-to-day changes in market value that you used to worship so fervently can now be thrown out into the street with the other garbage!

Maybe this hypothetical conversation will help. So how do you respond to that "How are you doing in this market" question? "Pretty well so far. Trading has been really good because of this wonderful market volatility. I’ve taken lots of quick, short-term profits that I’ve put back into new fixed income and equity positions. Most of my older holdings have come back well enough to escape gracefully. Base Income hasn’t been growing as quickly as I’d like lately because of lower interest rates, but I’ve actually been able to sell some fixed income stuff profitably as well.

I expect to increase working capital by at least 10% this year, just like last year. Overall it’s been another great year!" Be prepared for a blank stare (in 2000 and 2001), an open mouth and a "what are you talking about? "

Don’t forget to smile while your friend makes one more attempt: "Oh, I see, when did you get out of the market? You sure were lucky!" "Actually, it doesn’t ever make any sense to be out of the market. My equity allocation has always been around 70% and it will stay there until I’m a bit closer to retirement. I consider myself an investor, not a speculator."

We are replacing our profitable investments (merchandise we have sold at our store) with new ones that have potential for future profit (inventory on the shelves). Thus our current portfolio value will not "catch up" until new buying opportunities dry up. If you have nothing to buy, "smart cash" builds up (compounding at money market rates) while profit taking continues.

In recent years (1998 through March 2000), there were always many more stocks going down than going up, so finding new investments was not a problem. Over the past 18 months or so (through July 2001), the environment has turned around completely.

Remember "The Investor’s Creed" "My intention is to be fully invested in accordance with my planned equity/fixed income asset allocation. On the other hand, every security I own is for sale, and every security I own generates some form of cash flow that cannot be reinvested immediately. I am happy when my cash position is nearly 0% because all of my money is then working as hard as it possibly can to meet my objectives. But, I am ecstatic when my cash position approaches 100% because that means I’ve sold everything at a profit, and that I am in a position to take advantage of any new investment opportunities (that fit my guidelines) as soon as I become aware of them."

Click for Details --> WCM Part 1 <--

Retirement Ready Income Programs
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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.

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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.