Stop looking at income investing with a “grow the market value” perspective
by Steve SelengutMr. Selengut is a private investor and a contributing editor to LIFE&Health Advisor. He is the author of the book ‘The Brainwashing of the American Investor: The book that Wall Street does not want you to read.’ He can be reached at firstname.lastname@example.org.
March 16, 2017 — You’ll recognize much of what follows, but repetition is good for both souls and investment portfolios.
Falling prices in closed end income funds have always (yes, always) proven to be buying opportunities, especially when yields are in the 6% tax free/ 7.5% taxable neighborhood. With only one exception that I know of, stock market corrections have always increased the demand for income securities and today is the eight year anniversary of the rally that began March 9th 2009.
Historically speaking, high quality equities and income purpose securities generally fall less in market value and rebound faster than all other securities while, more importantly, maintaining the dividends and interest they were producing before the correction began. MCIM portfolios (your portfolios) are constructed with only these securities.
If there is a correction in either income purpose securities or in the stock market, your portfolios are very likely to produce the same income (or more) than they do right now even if you do nothing. If you can add to your portfolios as prices fall, you will be able to grow your income even faster… I will be adding to some positions every month.
On Sale: Baloney
I’ve heard a lot of discussion lately pressing the idea that rising interest rates are something to be feared, and prepared for by: buying the shortest duration positions, or even liquidating your holdings and waiting for higher rates to return. Some people are actually buying into this baloney… as evidenced by the erosion of income CEFs (Closed End Funds) prices.
Stop looking at income investing with a “grow the market value” perspective. That’s not what it’s all about. Lower market values or growing discounts to Net Asset Value are windfalls, not problems. Consider this:
- When we loan money to someone, is it better to get the lowest possible rate for the shortest period of time?
The purpose of income investing is to grow the income generated by the securities. Only bond traders need to fear higher interest rates. You need to learn how to benefit from them!
Control the quality selected, diversify properly, and compound that part of the income that you don’t have to spend. Price is pretty much irrelevant with income purpose securities; you don’t need to spend their “market value”.
Long, long, ago, many bonds were of the “bearer” variety; my father never owned any others. Each month, he went to the bank, clipped his coupons, and left the bank with a broad smile. If interest rates went up, he knew he could go out and buy new bonds to put larger coupon dollars in his pocket.
He had no reason to even consider selling the bonds he already owned — they were, after all, income purpose securities that (in his experience) never failed to do their job.
- Market value never fluctuates (visually) if the securities are kept in the (mental) safe deposit box.
No, that’s not at all what I’m recommending, and even when your brokerage statement shows that your bond prices have risen to chest-pounding wealth levels, just try to convert those numbers into spending money. Despite the profit-taking-temptation your statement reports, the bid you get on your smallish positions is never even close to the “insider” market value…
The thing dear old Dad thought about least was the market value of his bonds. This was his tax free retirement plan. He bought them for income, and the coupons were always redeemed without question. The only problem with the periodic decreases in market value was the inability to add to existing positions. Small bond positions have limited liquidity, making broker statement prices wishful thinking at best… fraudulent, perhaps.
- But they don’t call them “fixed income” securities for nothing!
Before I move on to the simple solution to this non-problem, a word or two on the only real benefit of lower interest rates — there is no benefit at all if you don’t already own individual, income producing, securities. If you own interest rate expectation (IRE) sensitive securities in a downward interest rate cycle, you will have the opportunity for what I call “income-bucket-gravy.”
This is the opportunity to sell your income purpose securities at a profit, over and above the income you’ve already banked. Income investors rarely are advised to do this, which is why they lament the perceived thievery occasioned by higher interest rates. They didn’t sell at a premium, so now they just sit and watch the premiums disappear.
The only thing this behavior accomplishes is bestowing on investors the lowest possible yields while pushing them into the overpriced market for short duration debt securities. A gift that keeps on stealing investor profits.
The solution is simple, and has been used successfully for decades. Closed End Funds (scoff, laugh, and say “leverage makes them volatile” all you like) solve all the liquidity and price change problems… in a low cost, much higher income, environment. The more volatility the better… because the fixed income (spending money) keeps right on coming.
Answer me one question before you throw stones at these remarks. Is 7% or more on a diversified, transparent, income portfolio, compounded over the past ten years and still growing income, better or worse than the 5.3% or less (growth not income) that most investors have realized in the stock market during the same time period… and then there are the profits that non-bond traders seldom realize can be realized.
Of course CEF market values fell during the financial crisis (the 3rd greatest buying opportunity ever), but at their peak in November 2012, they had gained nearly 65% since March 9, 2009, or 17.7% per year…. nearly outperforming the S & P 500.
But speaking of “draw downs”, what do you think the economic activity draw down of near zero money market rates has been for the past nine+ years, particularly for “savings account” Baby Boomers? Did low short term interest rates help or hurt your retired relatives?
Rising interest rates are good for investors; so are falling rates
Fortunately, they routinely move in both directions, cyclically, and now can be traded quickly and inexpensively for exceptional results from a stodgy old income portfolio. So much for Total Return, short duration, and leverage-phobic thinking.
What if you could buy professionally managed income security portfolios, with 10+ years income-productive track records? What if you could take profits on these portfolios, say for a year’s interest in advance, and reinvest in similar portfolios at higher yields? What if you could add to your positions in all forms of debt securities when prices fall, thus increasing yield and reducing cost basis in one fell swoop?
What if you could enter retirement (or prepare for retirement) with such a powerful income engine? Well, you can. but only if you are able to add both higher and lower interest rates to your list of Very Best Friends.
Today’s tax free income portfolios contain 28 issues paying 6% or more and another dozen paying about a 10th of a percent less. Managed by Blackrock, Dreyfus, Invesco, Pioneer, Nuveen, and Pimco, many have track records of more than 20 years… longer than any ETF in existence!
Taxable income CEF portfolios of the same management quality and experience yield between 7% and 9%.
What’s to be afraid of?