Submitted by The Investment Shadow
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What Your Mother Never Told You About Income Investing: Twenty Questions (16 thru 20)
16. And Closed End Funds are different?
Absolutely. Since CEF managers, both income and equity, don't have to sell their portfolio securities to redeem ownership shares, they can take advantage of lower prices and add to their portfolios as prices in general fall. This is what private portfolio managers do --- they buy high value securities when prices fall and take profits when they go back up in price --- precisely when the public is told once again that it is safe to get back into the rising market.
This is what I practice as "Market Cycle Investment Management", and the income allocation of these portfolios take advantage of the stability and resiliency of Closed End Income Funds.
17. But what about the income from these funds during the financial crisis?
Well, as you might expect, the market prices of the CEFs fell much more than ever before. But, and this is about the biggest news in the history of the financial markets, news that was totally ignored by the financial media: the income generated by taxable income CEFs (other than REITs and mortgage heavy investment funds) actually increased during the financial crisis. The same result was experienced in the Tax Free arena, but with no exceptions at all.
18. And how low did the prices go?
It was a little scary, but not when you saw the income being maintained month after month. Naturally, the yields nearly doubled as prices fell, so it was easy to reduce the cost basis of existing positions by reinvesting the monthly income. AND, prices didn't fall nearly as much as equity prices did.
Even better, the index of income CEFs has actually outperformed both the S & P 500 and the Dow since the market scraped bottom on March 9th 2009, and not by just a small margin. Interesting, isn't it. And why is it such a closely guarded secret?
19. And these types of income investments are available to all investors?
Yes, they sure are, hundreds of them, and have been for years. They are ignored resoundingly by investment professionals. If you call your broker and ask about them, you will be told they are unsafe because they use "leverage". This means that the management company goes to the capital markets, like any other business, to borrow money using preferred stock, bonds, etc.
Leverage is treated as though it were a four letter word. It isn't; people buy cars with it, shoppers shop with it, and investers properly invest with it. If I can borrow at 3% and buy a 5% yielding security, why wouldn't I do so? Without leverage, we'd all be riding to work every day on bicycles, and watching construction workers digging foundations by hand!
20. Is there an easy way to learn more about Closed End Fund investing?
Sure. After reading "The Brainwashing of the American Investor: The Book That Wall Street Does Not Want YOU To Read", investors should check out web sites like cefconnect.com for tutorials, definitions, and screening tools. Attending one of my free Income Investing webinars would also be a good idea.
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.