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Crisis Investing - The Three-Pronged MCIM Strategy
One of the great things about being a professional investor is the opportunity one has to apply his or her long-term experience to the investment environment that is unfolding (or coming unglued) in the present.
If nothing else, most successful investors develop a consistent strategy that allows them to take advantage of short-term changes/opportunities in a somewhat unemotional manner. You can always tell a "newbie" by a "let's see how you do for a year" comment, or a "what's hot" question.
Wall Street would like us to ignore the fact that the stock market is a cyclical beast that changes direction periodically, and almost never at the turn of a calendar quarter or year--- cycles vary in length, breadth, and direction. Inevitably, less experienced investors get caught with their portfolio egos down, unprepared for changing market realities.
Similarly, Wall Street wants investors to look at income securities (bonds, CEFs, preferred stocks, etc.) with the same analytical eye that they use for equities. They too are expected to grow in market value forever, even though it's the income that the investor should focus upon. High total returns mean missed profit taking opportunities more often than they signal increased income.
So as much as the "wizards of Wall Street" would like us to believe that up arrows are always good and down arrows always bad, and that they can get you safely hedged (protected) against the bad stuff with all forms of creative portfolio care products --- it's just never going to work out that way.
Cycles are a good thing. They cleanse the markets of residual fear and greed, and this time, perhaps, they'll point out that Modern Portfolio Theory (MPT) spawned ETFs and hedge funds don't ever produce the desired stable, and predictable, results.
Unfortunately, investors in general are a lot like teenagers. They think that they know everything immediately; expect instant gratification; take unnecessary risks; fall in love too easily; ignore all voices of experience; prefer the easy approach; and feel that the lessons of the past just can't possibly apply to what's going on now. Duh, dude!
That said, what can Joe the plumber do to protect his 401(k), IRA, or personal investment portfolio from the Bernies, Nancys, and Harrys that are waiting in ambush? How does he protect himself from unregulated scams, and Wall Street toxins, now, and into the future?
Well, it requires a slightly more mature mindset than the new media allows most investors the patience to develop, and an appreciation of the miracle drugs that have saved the lives of comatose portfolios victimized by the correction viruses of the past.
What if # 1: In the 30's, you had purchased shares in from 20 to 40 prominent, dividend paying, NYSE companies, or even in October '87, or '97. Now, if you had sold all those issues that gained 10%, and reinvested 70% of the profits keeping a diversified portfolio of similar stocks, hitting "replay" religiously, how much more market value would you have today?
What if # 2: At the same time, 30% of your portfolio was placed in high quality income securities, and 30% of the income produced (and the remainder of that produced by equity profits) was reinvested similarly, how much more income would you have today than you do now?
If you combined the two analyses, how much more "working capital" would be in your wallet? You would be amazed at the results of this research; it would lead you to these portfolio life saving, and KISS-principle preserving, conclusions:
One: Every market up cycle produces profit-taking opportunities, and all reasonable profits should be realized --- in spite of the taxes.
Two: Every market down cycle produces buying opportunities, and buying activities of three kinds must be continued throughout the downturn (adding new positions, adding to old positions, adding to income positions).
Three: Compound income growth is a wonderful thing, so find investment vehicles that can be added to routinely (managed income CEFs) and, if spend you must, always spend less than you make.
Four: Unhappily, nearly all of your past decision-making has been back___wards.
Just as the process described above is significantly more difficult to implement with mutual funds and index ETFs, so too is the three-pronged strategy for dealing with market opportunities.
Reinvest portfolio generated income in three ways, and leisurely according to your planned, working-capital-calculated, asset allocation. Good judgment and an awareness of overall industry conditions are always required:
One: Add new equity positions, in new industries if possible, and keep initial positions smaller than usual. Never buy a stock that does not meet all Market Cycle Investment Management (MCIM) selection criteria, and never stray more than 5% from your overall portfolio asset allocation guidelines.
These acquisitions should be monitored closely for quick turnover, at net/net profits of from seven to ten percent, depending on the amount of "smart cash" in your portfolio.
Two: Add new income positions when yields are unusually or artificially high, and watch for quick profits in this area as well. When yields are normal or lower than normal, diversify into new areas. For better results, do more "ones" than "twos" if possible.
Three: Add to positions in stocks that have maintained their quality rating and dividend while falling 30% or more from your cost basis. If the addition doesn't produce a significant change in cost per share, return to "one" or "two".
Add to positions in income securities to decrease cost per share and increase current yield simultaneously. Never allow a single position to exceed 5% of total working capital.
When the going gets tough, the tough go shopping, avoiding the buy high, sell low Wall Street game plan.
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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.
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.
|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.