Just the other day, I was discussing “retirement readiness” that has a small group of folks, many of whom were already retired. Not one of them owned, or had even read about, either equity or income Closed End Funds (CEFs)… vehicles that I have owned in professionally managed portfolios for years.
It is assumed that readers have read the six Q & A questions taken care of in Part One.
7. Why does it look like CEFs, Public REITs, and Master Limited Partnerships are now being ignored by Wall Street, the Media, and a lot Investment Advisors?
All three are income producers, as soon as they are “out there” available on the market, they trade like stocks… independently fundamental merits possibly at a price solely dependent upon supply and demand. Unfortunately, income programs have just never attracted the type of attention and speculative zeal which has been there for virtually every breed of growth vehicle.
Income mutual funds and ETFs can produce shares when needed, holding market price equal to NAV (net asset value). But the sole aim of each is to cultivate the rate and to make a stock market comparable “total return” number… salary is rarely mentioned within their product descriptions.
An income purpose security may relax in the same price neighborhood for decades, just spitting out 6% to 10% in income to invest in college educations, a retirement lifestyle, and world travel. But most investment advisors, ETF passivists, and mutual fund managers are rated around the annual “total return” that their portfolios or indices produce… income programs just don’t generate year end trips and substantial bonuses.
I was fired more than once myself, right before the dot.com bubble burst, because my 10% to 15% “returns” from premium quality stocks and income producers just couldn’t contend with the speculative fever that propelled the NASDAQ to 5000…
But because the markets crumbled in 2000, the “no NASDAQ, no IPO, no mutual funds =’s no problem” operational credo produced significant growth and income.
Another dilemma is broker/advisor compensation in Wall Street firms… totally determined by selling proprietary products and “investment committee” recommendations. There’s no room for slow growth based on premium quality dividend paying equities and income purpose closed end funds.
Finally, government cost and cost performance myopia precludes any inclusion of CEFs in 401k along with employer sponsored investment programs. Vanguard’s VTINX retirement fund pays under 2% following a minimal fee; many much better diversified CEFs pay 7% and much better after 2% if not more in fees. Yet the DOL, FINRA, as well as the SEC have somehow determined that 2% income is better than 7% of what they have incorrectly labeled “retirement income programs”
You won’t see a CEF, even equity or balanced portfolio CEFs, inside a 401k security selection menu. Public REITs and MLPs are not likely to be there either.
8. How many several types of CEFs exist; what can investors purchase them; and therefore are there any penalties for trading them frequently?
CEFConnect.com lists 163 tax free funds, 306 taxables, 131 US equity, and 204 non-US as well as other.
A partial number of types and sectors includes: biotech, commodities, convertible bonds, covered call, emerging markets, energy, equity dividend, finance, general equity, government securities, health, high yield, limited duration bonds, MLP, mortgage bonds, multi sector income, diversified national municipals, preferred stock, real estate property, senior loans, 16 different single state municipals, tax advantaged equities, and utilities.
CEFs are ordered in the identical manner as well as the same cost as individual stocks or ETFs, high are no penalties, fees, or extra charges for selling them frequently… they trade totally free in managed, fee-only, accounts, and constantly pay more cash than their peer ETFs and mutual funds.
9. What about DRIPs (Dividend Reinvestment Programs)?
There are in least four main reasons why I choose to never use DRIPs.
I do not like the idea of exacerbating positions higher than the original cost basis.
I can’t stand to shop when demand is artificially high.
I would rather pool my monthly income and select re-investment opportunities that permit me to relieve position cost basis and increase yield at the identical time.
Investors rarely help to increase portfolios in down markets; just when I need flexibility to provide new positions.
10. What are the most crucial things investor’s should understand in terms of income investing?
Actually, if the investor can wrap his mind around just three things, he is able to become a successful income investor:
Market value change doesn’t have a impact on income paid, and rarely increases financial risk,
Income security prices vary inversely with monthly interest change expectations (IRE)
Income purpose securities has to be evaluated within the amount and dependability on the income they produce.
Let’s point out that, three decades ago, we obtained a 4.5% IBM bond, a 30 yr 2.2% treasury note, and 400 shares of your 5.7% P & G preferred stock, all at par, and invested $10,000 in each. The $1,240 annual income continues to be accumulating in cash.
In now frame, rates have ranged coming from a high above 12% and recent lows around 2%. They have made no lower than fifteen significant directional changes. The monatary amount of our three “fixed income” securities may be above and below “cost basis” many times, as the portfolio “working capital” (cost foundation portfolio holdings) was growing regular.
And anytime the prices of such securities moved lower, their “current yield” increased while the identical dividend and rates of interest were being paid.
So how does Wall Street make this type of fuss when prices fall? Why indeed.
Over many years, we’ve accumulated $37,200 in dividends and interest; the web link and treasury note matured at $10k each, along with the preferred stock remains to be paying $142.50 per quarter.
So our cash account is $57,200 and our working capital has risen to $67,200 basically we haven’t lifted a finger or spent a short time concerned about fluctuating market values. This will be the essence of revenue investing, and the reason it makes no sense to consider it in precisely the same way as equity investing.
Investors ought to be re-programmed to focus for the income production of greenbacks purpose investments, and realize reasonable profits when they’re produced by growth purpose securities.
What after we reinvested the income regular in similar securities? Or sold the securities once they went up 5% possibly even… and reinvested the proceeds in portfolios of similar securities (CEFs), instead of individual entities, for diversification greater yield?
Assuming just $500 profit each year and a 5% average rate of interest, the portfolio “working capital” would grow to $168,700… a gain of roughly 462%. Income could be $8,434… a gain of 680%
I’m hoping why these conservative income numbers enable you to get a little more anxious about having a serious income purpose allocation inside your “eventually a retirement income portfolio”… particularly income CEFs. Don’t let your advisor talk you out of trouble of it; wall street game investments are not designed to have the income job done… dependably, over our retirement lifetime.
CEFs allows someone to invest in diversified portfolios of fixed income securities, by design, always at above individual security rates.
CEFs offer a uniquely liquid entity that permits investors to learn from IRE caused price modifications to either direction. Yes, it is exactly what I used to say.
11. Why take profits should the income from the security hasn’t changed?
Compound interest would be the “holy grail” of greenbacks investing. A 5% profit realized and reinvested today works a whole lot harder than 5% received over the course in the next a few months. Also, when interest levels are rising, profit opportunities are scarce, and proceeds can be used to work more productively compared with falling or stable rate of interest environments.
So suppose we have a “limited duration” bond CEF yielding 6%. We’ve held it for 8 months so we’ve already received 4.5% and that we can sell it today in a 4% profit. Thus, we could realize a nifty 8.5% (actually a extra since we’ve reinvested the last earnings), in only eight months.
Then, we can easily shop around with all the proceeds for the new CEF yielding 6% or older and desire to do a similar trade sometime soon with another in our holdings.
A second re-investment method is to help to increase several positions which are priced below current cost basis and yielding a lot more than the CEF we merely sold. This is a fantastic way to improve the “current yield” of existing positions while, at exactly the same time, assuring you will have more abundant profit taking opportunities when interest levels cycle downward.
12. How does one keep “working capital” rising
Total working capital, as well as the income it generates, will continue to develop so long since the income exceeds all withdrawals on the portfolio. Note that capital losses have no influence on income in the event the proceeds might be reinvested at the higher “current” yield… but working capital does take a short lived hit.
Portfolios are maintained on their asset allocation “track” with every batch of monthly re-investment decisions, nevertheless the larger the income purpose “bucket”, the simpler it is to ensure steady development in both income and dealing capital.
13. What is Retirement Income Readiness?
It will be the ability to get this statement, unequivocally:
Neither a currency markets correction nor rising rates of interest will have a negative affect on my retirement income. In fact, it’s more likely that either scenario enables me growing both my income and my working capital even faster.
My articles always describe elements of an investment process I have owned since the 1970’s, as described in my book, “The Brainwashing with the American Investor”. All the disciplines, concepts, and operations described therein interact to produce (in my opinion) a safer, more cash productive, investment experience. No implementation really should be undertaken and not using a complete knowledge of all aspects in the process.