The New Finance Of Longevity

Correction In Week 7: Thoughts, Numbers & Opportunities

As COVID-19 skews all market analysis, remember that every correction brings opportunities

by Steve Selengut

Mr. 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 sanserve@aol.com

I hope this finds all of you well, safely at home, and not taking any chances during this health emergency.

As I’ve said many times in the past, there has never been a correction that has not proven to be an investment opportunity, and even though there seem to be more sellers right now than buyers, the buyers have no intention of losing money on what they are purchasing. Now is the time to add to existing positions and to nail down attractive yields in new ones. Eventually, a trading “floor” is established, and the upward path is rebooted.

No one can predict how long this correction will last, but you should be taking advantage of both buying and profit taking opportunities as they occur. Do not take losses on historically sound positions just because their prices have fallen… that has never been a productive strategy for long term, income focused portfolios. In any other area of human activity, lower prices are welcomed… enthusiastically. Try to bring this attitude to the securities markets.

A Market ‘Yard Sale’

In 1987, a prolonged rally started to fade in August and ended abruptly in an October 19th “crash of historic proportions”. Nearly everything was down, nearly everyone seemed to be selling while we (MCIM process users) continued to buy at “yard sale” prices. Thirteen months later, we were taking profits on practically everything… the sellers not so much. No one was forced to sell anything to cover monthly cash flow… which actually grew during the period.

I think everyone would agree that ALL security prices are lower now than they have been in years, not just our type of securities (closed end funds). Some sectors are slightly weaker than others, but that is typical. Our universe of securities has been selected based on strict standards of quality, diversification, and income production. To date, none have defaulted, ceased operation, or eliminated their dividends.

In mid 1998 through early 2000, the dot.com rally left Investment Grade Value Stocks and income securities in the dust. When the bubble burst, our strategy produced a huge rally while the “no quality” sector folded its hand and left the table while those of us who stuck with the strategy experienced no correction at all. No one was forced to sell anything to cover monthly cash flow… which actually grew during the period.

Collectively, our present (2020) selection universe of nearly 200 professionally managed investment portfolios includes all market sectors, both growth purpose (stocks) and income purpose. The CEFs are actively managed by more than thirty five experienced, respected financial institutions. The size of your portfolio will dictate how many different positions you should own, but never allow an unusually large stake (more than 5%) in any one managed portfolio, much less any one individual company. More than half of our equity CEFs have less than 90% invested in common stocks..

Yes, all three melt downs were different, as is this one. But adjustments were made, actions were taken, and financial disaster was avoided.... unless you panicked and liquidated your portfolio during the correction....

During the mid 2007 through March 2009 “financial crisis”, all CEFs and individual stocks moved slowly, and significantly, lower. Many equities (Merrill Lynch, Lehman Brothers, and several banks) went under, but few CEFs (mortgages, mostly) followed suit. CEFs rallied to pre crisis levels months before the S&P 500 and with few exceptions, met all their dividend commitments throughout the debacle. No one was forced to sell anything to cover monthly cash flow… which actually grew during the period.

All Meltdowns Have Similarities

Yes, all three melt downs were different, as is this one. But adjustments were made, actions were taken, and financial disaster was avoided…. unless you panicked and liquidated your portfolio during the correction. Today, there are no reasonable income safety nets (CDs and money market funds) to fall back on to “wait it out”. If you sell securities now, your income will be gone and your expenses will have to be paid by liquidating principal.

My managed MCIM programs today are the same compound income machines that began the year, only bigger and stronger. In the first Quarter, in spite of the last several weeks, portfolios have generated $1.7 million in dividends and nearly $1.1 million in realized profits…. a 3% growth in capital in just three months! Yours should have experienced similar results.

More than 70% of this income has been reinvested, growing working capital to all time high levels. Total dividends increased 12% from January to February and the March total appears to be about 15% above March 2019 levels. No one was forced to sell anything to cover monthly cash flow… which actually grew during the period.

As of April 1st, while the S & P 500 rests nearly 30% below its February 19, 2020 all time high, CEF income has not changed. If some dividend reductions do occur in the coming months, properly constructed portfolios should have enough of an income cushion to weather the storm.

But let’s talk about how you can make your income picture even brighter…

Your regular monthly income and realized profits should be put to work in two ways to take advantage of average yields on income CEFs in excess of 10% and even higher equity CEF payouts! (All a function of lower prices… the payment amounts per share are about the same.) You should be:

Adding to existing positions to reduce their cost per share and to increase their current yield.
Adding small positions in new securities in the hope of realizing short term profits to reinvest at higher yields.

You have the opportunity to make the most of the current situation, thus increasing your income in months to come.

Here are a three new opportunities:

  • Look at the current level of withdrawals from your investment accounts and try to reduce it.
  • Think about stopping your RMD withdrawals for 2020, and investigate “no penalty” withdrawals from your 401k plans. I believe this relief is for retirees only, so check with your accountant first.
  • At current prices, some tax free CEFS are once again yielding above 5.5%. Perhaps they deserve a slot in your income bucket once again.