Wait a minute… what did he just say?
by Steve SelengutMr. Selengut is a private investor and author of the books ‘Retirement Money Secrets: A Financial Insider’s Guide to Income Independence’.’ and ‘The Brainwashing of the American Investor: The book that Wall Street does not want you to read.’ He can be reached at email@example.com.
If this was the headline anyplace else in your life, you’d be out the door in a moment, racing to take advantage of the newfound bargains! The financial markets are no different, really.
You still insist on quality merchandise, you shop around for the best deals, you try to get the most product for your money. The exact same securities you own or have owned in the past are now available at significant discounts AND nearly all of them are still paying out the same dividends, the same monthly distributions, that they did when their prices were 30% higher!
We are twenty-seven months into this correction in higher income producing securities, and only because interest rates threaten to keep rising. Nothing else has changed. Their payments haven’t changed, many are actually rising, and you are (or could be) growing your income at a rate unequaled in the past twelve years of historically low interest rates.
The equity markets are also in a serious correction. Not only from higher interest rates, but also from economic, political, and global issues that just seem to keep escalating. The market averages are down seriously, with the tech heavy NASDAQ leading the way at more than 20% below its 2021 all-time high. The S & P and DOW are 14% and 12%, respectively, below their 2021 all-time records.
As traumatic as a prolonged correction is to investors in all age groups, it’s perhaps most devastating to those of us who depend upon our investment portfolios to pay a significant portion of our bills in retirement. The flaws in the 4% of portfolio market value drawdown action plan have now become in-your-face scary.
Each month, the number of shares or units sold to make your monthly payments increases, accelerating the shrinkage of both your market values and your already anemic realized investment income (i.e., spending money). The question becomes: “Will we survive until the next rally begins?” So why is this guy (me) smiling between the lines here? Why is he is writing in large bold letters: Take advantage of this situation while you still can. It won’t last forever?
Clearly, he must know something that many of us do not. And here it is.
More Realized Spendable Income
Investment portfolios, particularly those that are expected to help pay retirement expenses can be designed to generate far more realized spendable income than those that most investors are stuck with by an advisor community that gets paid based on AUM (amount under management) instead of the amount of spendable income being produced for their customers.
The portfolios that I’m trying to introduce you to typically generate more than twice the 4% bogey that most retirees live with in rub-you-hands-together spending money. In a correction, those yields are even higher.
Did that get your attention? These are the securities that I address in my book. They are Closed End Funds (CEFs), and they’ve been around longer than either Mutual Funds or ETFs, while containing pretty much the same individual stocks and bonds that the others do.
But they are pass-through trust vehicles that must pay out 95% of their realized income to shareholders. They are not designed to grow in market value. Their purpose is to grow and disburse a steady stream of income. When they do rise in value (as interest rates stabilize or move lower), they can (and should) be sold for profits. Equity CEFs are designed to produce capital gain and option premium income so that they too, can produce a growing and dependable stream of income for shareholders.
There are differences between CEFs and the other funds you’ve become accustomed to in your 401k and other model portfolios, but they go about the investing process in an obsessively income focused manner that makes them a perfect addition to retirement income focused portfolios.
From Corrections To Rallies…
As you are probably aware, there has never been a correction that has not, eventually, been replaced by a rally (and vice versa). But an investor, and I mean any investor no matter how wonderful the advisor or advisory company, cannot take advantage of this normal, but unpredictable, nature of the securities markets in a market value/total return growth only focused environment.
If you do not generate more spendable income than you need each and every month, you will never be able to take advantage of the low-price opportunities provided by corrections especially if you reinvest distributions automatically. Market value growth may often fuel your ego, but it will never, not ever, fuel your yacht. You need spending money to do the things you need to do, and your need significant spending money to do the things that you would really like to do, particularly in retirement. No other investment vehicle can get this done for you the way CEFs can. As this is written, there are over 200 high quality, well diversified, Closed End Funds that average more than twenty years in operation and which yield, on average, upwards of eleven percent.