Kiawah Golf Investment Seminars

The Pure Logic of Income Investing

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Investment portfolios perform best over the long term when cost based asset allocation is used to keep the investment management decision maker (the investor) focused on specific targets.

Important "secondary" considerations are strict security quality, price, income generation and diversification rules... and, profit taking targets, which are essential for every security in the investment portfolio...

So how does any of this apply to income investing? Proper asset allocation divides the portfolio into just two "buckets" of securities: equity and income. The primary focus of the former is growth through profit taking, and that of the latter is the generation of income. At least 40% of the portfolio's Total Working Capital should be invested for income.

Typically, the older (or wealthier) a person becomes, the larger the income bucket target should be.

Income investing can be sane, logical, intellectually pure, purposeful, manageable, predictable, and incredibly easy to understand. Yet, more investment mistakes are made in this area than in stock market investing --- particularly when it comes to performance evaluation.

Most income securities represent some form of debt. One party has borrowed money from another and has agreed to pay back the debt at some future date, and to pay for the use of the money until the debt is repaid. There are many forms of debt, and each will have a lawyer's dream of complicated provisions requiring schools of financial experts to understand thoroughly. 

Fortunately, there is no need for investors to deal with this contractual messiness... It's enough to understand that contractual rates are generally "fixed" --- thus the change in value of marketable securities when interest rate expectations move in either direction. The income remains the same.

Many years ago, open end mutual funds opened the equity markets to the masses. After self-direction of personal and corporate savings plans (which are not retirement or pension plans) poisoned the management process, Wall Street developed a no-management-at-all breed of passive speculations (ETFS).

Interestingly, the sales ploy for indexed investing is the demonstrated failure of fund managers --- simply ignoring the fact that mangers must do what the "mob" dictates. "Mutual fund management" is the ultimate oxymoron.

School is still out on indexed time bombs, and although they have captured the speculative zeal of the masses, aren't they managed by the same mob of non-professionals that killed open end mutual funds? Neither vehicle cares an ounce for the retirement income needs of investors.

Income CEFs, if one selects thoughtfully, diversifies properly, and assesses the risks prudently, are far less risky than their bubilisiously (sic) passive ETF cousins. They remain managed by investment professionals; they remain influenced by the same economic forces that have gyrated market prices since forever; they spit out monthly income at a rate far in excess of anything else on the entire Wall Street investment product menu.

Unlike indexed ETFs and mutual funds, their price (theoretically) is tied to the demand for the skills of the manager and the inherent risk/reward assessment of the cash flow produced by the securities inside. The Net Asset Value (NAV) worshipped so ardently by speculators is allowed to follow interest rate cycles and credit market conditions.

Market Cycle Investment Management investors know that investing is inherently a contact sport --- passivity doesn't grow the income generating power of an investment portfolio. That requires an understanding of what's inside, and an appreciation of how to grow the amount of capital at work within the portfolio.

ETF and mutual fund portfolios are low income generators --- they grow on speculative greed and disintegrate during market meltdowns... "working capital" is not a familiar concept to the average bulls and bears on Wall Street.

Wealth routinely, and repeatedly, gets wiped out overnight as panic takes hold of inflated ETF and mutual fund prices and brings valuations back to basic realities... and there never was any "base income" to put a floor under declining security prices.

CEF managers, on the other hand, are investors who run their portfolios with an emphasis on the income that they generate --- yes, you can even find equity portfolio CEFs with bond-breaking yields. Of course there is market price volatility in the Closed End Fund marketplace... that's part of the magic.

Where else in the income investing milieu can you buy more of owned corporate and municipal bonds, and government securities without a mark-up induced nosebleed. Just as surely as private, individually managed, Investment Grade Value Stock portfolios should consistently outperform managed-by-the-mob equity mutual funds and ETFs cycle to cycle, income CEFs are a sure fire way to control portfolio "breakage" during cyclical market downturns.

Wall Street would have us believe that market volatility is always a bad thing; that higher prices are always good and lower prices always bad; that passive speculation strategies using multiple ETFs can somehow hedge your "bets" and reduce your pain during downturns.

Flattening the curve if you will, until the next upturn... with Mad Portfolio Theory on your side all the way. Since when have bets and hedges become investment terms?

MCIM keeps it simple. Just over a 7% annual gain in working capital (the stuff that produces your income) will double your portfolio working capital (and hence your income) in about ten years. Then, in the "equity bucket", taking advantage of volatility by buying (very selectively) during the downturns, and selling for reasonable profits (all securities) at every opportunity.... hmmmm

Now throw in one more consideration already within the MCIM formula: never, ever, buy a mutual fund, a NASDAQ stock, an IPO, or a non-IGVSI equity, and maintain at least 40% of your working capital in income CEFs....

Well "big brother" doesn't allow me to go further. You'll have to investigate for yourself, at least to find out "what is this working capital thing he keeps talking about...?


 
Kiawah Golf Investment Seminars
3912 Betsy Kerrison Pkwy
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 free tour of a professional investment managers' private SEP IRA program during ten years surrounding the financial crisis:

CLICK HERE

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 IGVSI companies, 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.

https://www.dropbox.com/s/b4i8b5nnq3hafaq/2015-02-24%2011.30%20Income%20Investing_%20The%206_%20Solution.wmv?dl=0

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.