Part One of an article in an upcoming issue of Trader's World Magazine
There's nothing like a credit crunch, a meltdown in IRA and 401(k) market values, and an unprecedented mess in the mortgage market to make the point: income investing is something that even the most dedicated equity trader needs to deal with... eventually.
Unfortunately, most investors are less than familiar with the complicated nature of income producing securities and, more importantly, the availability of income producers in "tradeable", professionally managed, form.
Attention traders! You can bring your well honed equity skills to the most conservative securities on the planet and absolutely grow a secure retirement income at the very same time. Managed Closed End Funds (CEFs) trade in the same way as common stocks, and on the same exchanges.
From the (unaudited) chart that you can access here, you can see that the safest of income-only-portfolios grew roughly 80% in a time frame in which the S & P 500 was up less than 3%... Yes, I know this is apples vs. oranges, but eventually you will realize:
- that proper Asset Allocation is an exceptionally tasty fruit salad, and
- that retirement requires more than just the hope of endless profitable equity trades
Please refer to the disclaimers on this webpage and the footnotes on the chart, but briefly: The time frame is 12/31/06 through 9/30/12; the black line tracks the price of 5 fixed income index ETFs; the yellow line tracks the prices of ten managed tax free income CEFs; the hot pink line reports the market value of two tax-free-CEF-only portfolios with no deposits or withdrawals other than management fees.
So it's a fact, we can, as actively as we care to, trade both asset allocation "buckets"* using nothing but the highest quality possible securities we can get our hands on. OK, so you aren't quite ready for the boredom of Investment Grade Value Stocks --- too expensive and stable for day-to-day trading.
But you do need to get your cash flow growing now; whether you are 22 or 52, right now; developing a stream of dependable spending money is even more important than you think. I started my tax free income portfolio in 1970, with the proceeds from my very first equity trade (Royal Dutch Shell).
Many traders like to operate within a zero "portfolio" environment --- establishing and closing positions daily. Little thought, time, or effort is given to long range planning for the future wealth that is being created. Let's step back for a moment, and consider that last proposition.
What is the long run purpose of this "trading" regimen we subscribe to if not wealth creation? What is the function of wealth if not to provide the income you need to sustain the life style you aspire to?
When push comes to shove, it's your income that pays the bills, so why not be sure that you are growing it while along the way to when and where it is needed.... today, my tax free and tax deferred portfolios generate an estimated four times my monthly Social Security payment... and I'm still trading equities.
My suggestion is that you balance your "portfolio" with at least 30% of the "Working Capital"* committed to income production, all of the time. In other words, invest a portion of your trading capital in tradeable income Closed End Funds (CEFs), using Quality, Diversification, and safe Income production as your selection criteria (the QDI*).
The objective is to create a less risky, trading friendly, compound income factory that will become your own personal "Eveready" income bunny --- with or without any additional contributions from your equity trading activities.
My recommendation, however, is that you transfer at least 30% of every equity trading profit to the "My Retirement Income Fund" asset allocation "bucket". Before we get into the "how" of this creative endeavor, we need to talk about risk and experience.
As good as you are at short term equity trading, you certainly are aware of the risks involved; you know that losses can and will occur for a myriad of reasons. The risks involved with trading income CEFs can be much lower and much easier to control, but if it really is an investment, risk is part of its DNA.
The reason people assume the risks of investing in the first place is the prospect of achieving a higher rate of return than is attainable in a risk free environment... i.e., an FDIC insured bank account. Risk comes in various forms, but the average investor's primary concerns are "credit" and "market" risk... particularly when it comes to investing for income.
Credit risk involves the ability of corporations, government entities, and even individuals, to make good on their financial commitments to the folk who lend them money. Market risk refers to the absolute certainty that there will be changes in the market value of the selected securities.
All marketable securities --- including T-Bills, Bonds, and Notes will fluctuate in market value. And these three, intrinsically the safest of all, pay the least income and react the most violently to rising interest rates. Can interest rates stay as low as they are now forever?
We can minimize credit risk by selecting only high quality (investment grade) securities and market value risk by:
- diversifying properly,
- understanding that market value changes are generally benign events, and
- by having an action plan for dealing with market price fluctuations.
For more information about income CEF investing, contact John Dohn.
Next Income Investing Webinar:
Asset Allocation Buckets, Smart Cash, Base Income, Working Capital & the QDI are terms used with unique, specialized, meanings within the Market Cycle Investment Management Methodology. They are explained in: "The Brainwashing of the American Investor: The Book That Wall Street Does Not Want YOU to Read"