So, what are ‘most’ investors doing about it?
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 email@example.com
Statistically speaking, the past twelve months have been pretty “blah” for “most” investors, and traumatic for those who withdraw more each month than the income being generated by their portfolios.
Since its last “ATH” (all time high) on May 21st 2015, the S & P 500 has moved sideways and lower, but with significant profit making volatility.
“Most” retirees withdraw roughly 4% annually from their investment portfolios. So “most” of them are “dipping into principal” every month that their portfolio does not produce income at a 4% annual rate. Neither total return nor market value can be used to buy airline tickets… only net realized income can be spent without reducing portfolio principal.
“Most” investment portfolios, individually held and/or maintained within 401k benefit programs, are equity based, stock market invested, portfolios. The popular Vanguard Target Retirement 2015 Fund (VTXVX) is 47% invested in various stock markets; the Retirement Income Fund (VTENX) is one third equities.
Income In Your Pocket
The income-in-your-pocket yield of these well respected and ultra cheap vehicles is less than 2%. Similarly, individual portfolios, IRAs, etc. are almost universally invested for “growth”. In either case, performance is measured in terms of market value or total return. Realized income is rarely a consideration.
“Most” investment portfolios, professionally managed or not, focus on growing market value. But neither total return nor market value are relevant from a retirement income perspective. Preferred stock, corporate and municipal bonds, pay the same income regardless of market value. Investment Grade Value Stocks (IGVSI) generally pay the same or increasing dividends regardless of market value.
Only recently, at a sixty-something birthday gathering of mostly affluent individuals, retirement planning conversation emphasized market value growth and total return. Income was never mentioned. (“I need to get my portfolio back up to this dollar level before I can hope to retire and maintain my lifestyle.”)
Blank stares and confusion greeted my comments on asset allocation and income producing securities. (“My dear friend at Merrill assures me that I’m making 10%, and she’s such a nice person.”) The reality is probably much different, considering that:
- The S & P 500 gained less than 6% per year, compounded, in the 10 years from May 19th 2006 through May 20th 2016. A diversified portfolio of tax free Municipal Bond Closed End Funds would have paid more than 6% per year in dividends during the same time frame.
- In the 10 years from December 15th 1999 through December 15th 2009, the S & P went down more than 2%
- The S & P 500 has gained less than 3% per year in this century, while paying less than 2% in dividends.
Not one person knew, or seemed to care about, the income being produced by their portfolios and its relationship to their income needed in retirement. Eyes glazed over when I spoke about income focused investing, and profit-taking was not something their “very nice persons” ever seemed to recommend.
Clearly, the language of investing for retirement (as opposed to the hype and anxiety of periodic changes in market value) is as foreign to the affluent as it is to the average 401k participant. Everyone knew the stock market had been weak for a year or so; no one had experienced any trading profits; no one believed that 6% tax free has been available to them for decades.
Since May 21st 2015 (@2130.82), S & P 500 volatility has produced nothing less than an investment tutorial… particularly if you superimpose an energy sector line on the chart below.
A closer look at the over-looked CEF market
While the stock market produced outstanding trading opportunities (two mini-corrections followed by climbs approaching new ATHs), the (totally ignored by Wall Street) CEF marketplace pumped out dividends at normal rates: 6% tax free, 7% tax advantaged, and 8+% taxable.
- Since May 2015, the MCIM Indices of tax free and taxable Closed End Funds gained an average 29% in market value while generating approximately 7.5% in realized income… plus dozens of “one-year’s-income-in-advance” profit taking opportunities.
- Equity CEFs were equally income productive.
- It is likely that you will never, ever, see any of these securities (which have been around since the mid-nineties) in your 401k product menu or a non-MCIM managed IRA portfolio.
Why don’t retail brokers encourage their clients to: a) trade individual Investment Grade Value Stocks and b) grow a safe and secure cash flow by owning both equity and income CEFs? Buy a copy of “The Brainwashing of the American Investor: The Book That Wall Street” Does Not Want YOU to Read” for the answers.
“Most” investors, as opposed to “all” investors, have a limited feel for the distinction between growth focused and income purpose investing because “most” investment advisors are encouraged by their Wall Street financial institution employers (in their compensation packages) to push financial products exclusively.
Ironically, the regulatory environment at the financial advisor level has exacerbated the retirement income development problem. CEFs are just too expensive; the best quality company equities may not “beat” higher speculation portfolios. Cost considerations have become more important than “the QDI”.
As a result, “most” individual investors are only exposed to those products and services that their advisors are required to sell. How many of you know about the higher safety and much higher dividends of IGVSI companies and the much higher income, diversification, and quality provided through several forms of CEFs?
Market Cycle Investment Management
Those few who have discovered Market Cycle Investment Management (MCIM) select stocks from a universe of only 350 NYSE dividend payers with the four highest S & P fundamental quality rankings. Less risky than the content of most Mutual Funds and ETFs, and everyone a dividend payer.
Changes in market value in MCIM portfolios have little or no impact on income production. Even a negative “total return” (where portfolio market value falls by more than the income produced) is meaningless when the “realized income” itself is greater than the dollars withdrawn.
Pre-retirement MCIM portfolios contain at least 40% income purpose securities, with higher percentages at higher ages. At retirement and beyond, job #1 is to produce more income than is needed by the retiree. The “after all expenses” yield of MCIM retirement portfolios is nearly three times that of the Vanguard funds mentioned above.
So some investors are able to focus their efforts (and their managers’) on quality, diversification, and income in excess of the monthly amount they need to spend.
Enter The DOL
Second only to the portfolio destruction caused by individual investor ignorance is the regulatory ignorance of the Federal Government in its misguided emphasis on cost management inside employee savings programs… and now, inside Individual Retirement Accounts.
- On the plus side, DOL regulations may put an end to the use of Variable Annuities in IRA programs. These oxymorons bring stock market risk into an arena where speculation should be discouraged.
- But what of the client who is so risk averse that a guaranteed lifetime income is appropriate… there is a place for fixed annuity products, high cost or not.
Most professional investment managers have no problem accepting “fiduciary responsibility” for managed portfolios. We select the securities, we make the decisions, and our clients have a working knowledge of exactly where we are going with their programs.
We are not forced to include or exclude particular securities or products… and we don’t get paid based upon what we buy or sell. Our fee is a function of portfolio market value, which is probably the fairest way to charge, even when income production, not market value, is the primary objective.
Actually, 37 years of experience shows pretty clearly that the best long term market value growth comes from portfolios with at least 40% invested for income.
Nothing could make me embrace Mutual Funds, ETFs, or annuity products because of their costs, poor quality content, and awful income production. And, I would not be willing to stop investing in long track record income producing portfolios just because the government thinks that 1.8% after low expenses is better than 7% or 8% after higher expenses.
Fiduciaries (in my opinion), have a responsibility to minimize portfolio risk by utilizing time tested selection quality, security diversification, and income production principles. The DOL’s emphasis on “low cost” as the primary investment criteria is ridiculous, politically motivated, and counterproductive for investors in general, retirees in particular.
Equally absurd is the idea that a financial advisor who sells investment products is a fiduciary when: a) he is required to do so by his employer, and b) when the employer does not have equal fiduciary responsibility.
Truth be told, if the Wall Street product creators had fiduciary responsibility, we would have fewer, and better, products out there… much to the long term benefit of investors everywhere.