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Income Investing: Do YOU Have The Right Stuff?
When Interest Rates Start Rising ... and Beyond
When is 3 percent better than 6 percent? Yeah, we all know the answer, but only until the prices of the securities we already own begin to fall. Then, logic and mathematical acumen disappear and we become susceptible to all kinds of special cures for the periodic onset of higher interest rates.
We’ll be told to sit in cash until rates stop rising, or to sell the securities we own now, before they lose even more of their precious market value. Other gurus will suggest the purchase of shorter-term bonds or CDs (ugh) to stem the tide of the perceived erosion in portfolio values.
There are two important things that your mother never told you about Income Investing: 1) Higher interest rates are good for investors, even better than lower rates, and 2) Selecting the right securities to take advantage of the interest rate cycle is not particularly difficult.
Higher interest rates are the result of the government’s efforts to slow a growing economy in hopes of preventing an appearance of the three headed inflation monster. A quick glance over your shoulder might remind you of recent times when the government was trying to heal the wounds of a misguided Wall Street attack on traditional investment principles by lowering interest rates.
The strategy worked, the economy rebounded, and Wall Street scrambled back to where it was nearly six years earlier. Think about the impact of falling interest rates on your income purpose securities. Bonds and preferred stocks; government and municipal securities --- they all moved higher in market value.
Sure you felt wealthier, but the increase in your annual spendable income got smaller and smaller. Your total income could well have decreased during the period as higher interest rate holdings were called away (at face value), and reinvestments were made at lower yields.
How many of you have mental bruises from the realization that you could have taken profits during the downward trajectory of the interest rate cycle, on the very securities that you now lament over. The nerve; falling below the price you paid for them years ago. But the income on these turncoats is the same as it was years ago, when prices were so much higher.
This is the work of Mother Nature’s financial twin sister. It’s like acorns, snowfalls, and crocuses. You need to dress properly for seasonal changes and invest properly for cyclical changes. Remember the days of "Bearer Bonds"? There was never a whisper about market value erosion then. Was it the IRS or institutional Wall Street that took them away?
Higher rates are good for investors, particularly when retirement is a factor in your investment decisions. The more you receive for your reinvestment dollars, the more likely it is that you won’t need a second job to maintain your standard of living. I know of no retail entity, from grocery store to cruise line that will accept the market value of your portfolio as payment for goods or services.
Income pays the bills, more is nearly always better than less, and only increased income levels can protect you from inflation. So, you say, how does a person take advantage of the cyclical nature of interest rates to garner the best possible income on investment quality securities? You might also ask why Wall Street makes such a fuss about the dismal bond market and offers more of their patented "Sell Low, Buy High" advisories --- but that should be fairly obvious.
You should all know by now that an unhappy investor is Wall Street's best friend.
Selecting the right securities to take advantage of the interest rate cycle is not particularly difficult, but it does require a change in focus from the statement bottom line --- and the use of a few security types that you may not be 100% comfortable with.
I’m going to assume that you are familiar with these investments, each of which could be considered (from time to time) for a spot in the well diversified income "bucket" of your asset allocation:
1) The traditional individual municipal and corporate bonds, treasuries, government agency securities, and preferred stocks. 2) The eyebrow raising, variable income varietals: closed end funds, royalty trusts, REITs, and MLPs.
[Purposely excluded: CDs and Money Funds, not investments by definition; CMOs and Zeros, mutations developed by some sicko MBAs; and open end mutual funds, which just can’t work because they are really “managed by the mob” --- i.e., investors.]
The market rules that apply to all of these are fairly predictable, but the ability to create a safer, higher yielding, and flexible portfolio varies considerably within the security types. For example, most people who invest in individual bonds wind up with a laundry list of odd lot positions, with short durations and low yields, designed for the benefit of that smiling guy in the big corner office.
There is a better way, but you have to focus on the income and be willing to trade as opportunities present themselves....
Click for Details --> Finding the Best Stuff
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.