Retirement Ready Income Programs

Forming Valid Income Investing Expectations - Part Two

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The critical relationship between the two classes of securities in your portfolio, is this: the market value of your equity investments and that of your fixed income investments are totally, and completely unrelated. Each market dances to it's own beat. Stocks are like heavy metal or "rap" --- impossible to predict. Bonds are more like the classics and old time rock-and-roll --- much more predictable.

Thus, for the sake of portfolio smile maintenance, you must develop the ability to separate the two classes of securities, mentally, if not physically. For example, if your July 2005 Market Value fell, it was because of higher interest rates not lower stock prices. More recently, the combination of higher rates and a weaker stock market has been a "double whammy" for portfolio market values, and a double bonanza for investment opportunities.

Just like at the mall, lower securities prices are a good thing for buyers --- and higher prices are a good thing for sellers. You need to act on these things with each cyclical change; you must be willing and able to wear both hats --- simultaneously.

Here's a simple way to deal with income security market values to avoid shocks and surprises. Just visualize the "scales of justice", with or without the blindfold. On one side we have a number that represents the current value of your income portfolio. On the other side, we have a small "i" for interest rates, and "up" or "down" arrows that represent interest rate directional expectations.

If the world expects interest rates to rise, or even to stop going down, "up" arrows are added to "i" and the market value side moves lower --- the current scenario (and the scenario when this article was first published). Absolutely nothing can (or should) be done about it. It has no impact at all on the contracts you hold or the interest that you will receive; neither the maturity value nor the cash flow is affected --- but your broker just called with an idea.

The mechanics are also simple. These are negotiable securities that carry a fixed interest rate. Buyers are entitled to current rates, and the only way to provide them on an existing security is to sell it at a discount. Fortunately, one rarely has to sell.

Over the past few years of falling interest rates, income securities have risen in price and investors (should) have realized capital gains as a result --- adding to portfolio income and to Working Capital. Now, that trend has reversed itself and you have the opportunity to add to existing holdings, or to buy new securities, at lower prices and higher interest rates. This cycle will be repeated forever.

So, from a "let's try to be happy with our investment portfolio because it's financially and emotionally healthier" standpoint, it is critical that you understand changes in market value, anticipate them, and appreciate the opportunities that they provide.

Comparing your portfolio market value with some external and unrelated number accomplishes nothing. Actually, owning your fixed income securities in the most freely negotiable manner possible can put you in a unique position. You have no increased risk from a reduction in security prices, while you gain the ability to add to holdings at higher yields.

It's like magic, or is it justice. Both sides of the scales contain good news for the investor --- as the investment gods intended.

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Retirement Ready Income Programs
2971 Maritime Forest Drive
Johns Island, SC 29455
Phone (800) 245-0494 • Fax (843) 243-8509
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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.

Please join the private article mailing list or Call 800-245-0494 for additional information

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.