Kiawah Golf Investment Seminars

Income Closed End Funds & Total Return Analysis

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What are the two main reasons mere mortals invest in income purpose securities: one is their inherent safety compared to equities... a 50% income asset allocation is much safer and theoretically less volatile than a 100% equity exposure.  

There is less risk of total loss in XYZ company bonds or preferred stock than there is in XYZ common stock... a major fact of investment life roundly ignored by most investors/speculators in overpriced stock markets.  

Equally important (as retirement looms larger) is the income these securities produce, first for compounding and then for spending.

Unlike Tom Wolfe's "Masters of the Universe", most of us are not bond traders. If our income inventory shrinks in market value, we don't have to sell our positions. Wall Street fixed income pros don't care about income production... buying and selling inventory is their business model, and they must trade at market prices. 

The "higher interest rates are coming panic" you are hearing about in the media is a real problem for Wolf's MOTUs, but it may be an investment opportunity for the rest of us. If I buy an Exxon 4% debenture, a 3% 30 year municipal bond, or a 10 year treasury note, three things are inherently true:

If interest rates rise, their market values will go down and it will be difficult to add to my positions... BUT my income (and their safety vis-a-vis equities) will not change; MARKET VALUE CHANGE HAS NO IMPACT ON INCOME. (typically, in high quality securities)

 

It is this "Interest Rate Expectation (IRE) Sensitivity" that CEF Investors are uniquely well positioned to take advantage of. All income focus securities (and funds that contain them) are impacted by IRE:

 "Market Value Varies Inversely With Interest Rate Expectations" 

The Net Asset Value (NAV) of CEFs is the sum of the values of hundreds of securities. They are inside a "protective dome", where only the manager can trade them. BUT we can "trade" the dome itself, reducing our cost basis and increasing our yield as we choose... something totally unimaginable in any other income investment medium.

So this is precisely what is going on "inside" income CEFs right now. Individual security prices are being forced down by the expectation of rising interest rates and a significant discount is available. Absolutely nothing has changed with respect to the quality of the securities or the income being produced "Under The Dome". The price of the dome has been reduced, and its "IN-YOUR-POCKET" income is rising.

No change in the securities, their quality, or contractual payments... only the price of the package has changed. So there they are investors, waiting for you to pad your retirement portfolios with income over 6.5% tax free and up to 8.0% taxable. 

These sweet discounts are only available through the financial genius of CEFs. Only here can "mere mortals" turn Wall Street's higher interest rates phobia into an income portfolio worth bragging about. There has been no news that suggests there is anything wrong with the securities under the vast majority of high quality CEF domes.

So don't be concerned with the "OMG, bond prices are falling" headlines... that's Wall Street's problem. This is the biggest CEF sale since 2011.

What are YOU waiting for, the Call to the Mall has sounded!


 
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.