More mistakes are made here than in stock market investing
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 [email protected]
Investment portfolios perform best over the long term when cost based asset allocation is used to keep the investment management decision maker (the investor) focused on specific targets.
Important “secondary” considerations are strict security quality, price, income generation and diversification rules… and, profit taking targets, which are essential for every security in the investment portfolio…
So how does any of this apply to income investing? Proper asset allocation divides the portfolio into just two “buckets” of securities: equity and income. The primary focus of the former is growth through profit taking, and that of the latter is the generation of income. At least 30% of the portfolio’s Total Working Capital must be invested for income.
Typically, the older (or wealthier) a person becomes, the larger the income bucket target should be.
Income investing can be sane, logical, intellectually pure, purposeful, manageable, predictable, and incredibly easy to understand. Yet, more investment mistakes are made in this area than in stock market investing — particularly when it comes to performance evaluation.
Most income securities represent some form of debt. One party has borrowed money from another and has agreed to pay back the debt at some future date, and to pay for the use of the money until the debt is repaid. There are many forms of debt, and each will have a lawyer’s dream of complicated provisions requiring schools of financial experts to understand thoroughly.
Fortunately, there is no need for the average investor to deal with this contractual messiness… It is enough just to understand that the contractual rates are “fixed” — thus the change in market value of “negotiable” securities when interest rate change expectations move in one direction or another. These changes have no impact on the income generated.
Many years ago, open end mutual funds opened the equity markets to the masses. After self-direction of personal and corporate savings plans (which are not retirement or pension plans) poisoned the management process, Wall Street developed a no-management-at-all breed of passive speculations (ETFS).
Interestingly, the sales ploy for indexed investing is the demonstrated failure of fund managers — simply ignoring the fact that mangers must do what the “mob” dictates. “Mutual fund management” is the ultimate oxymoron.
School is still out on indexed time bombs, and although they have captured the speculative zeal of the masses, aren’t they managed by the same mob of non-professionals that killed open end mutual funds? Neither vehicle cares an ounce for the retirement income needs of investors.
Income CEFs, if one selects thoughtfully, diversifies properly, and assesses the risks prudently, is far less risky than their bubilisiously (sic) passive ETF cousins. They remain managed by investment professionals; they remain influenced by the same economic forces that have gyrated market prices since forever; they spit out monthly income at a rate far in excess of anything else on the entire Wall Street investment product menu.
Unlike indexed ETFs and mutual funds, their price (theoretically) is tied to the demand for the skills of the manager and the inherent risk/reward assessment of the cash flow produced by the securities inside. The Net Asset Value (NAV) worshipped so ardently by speculators is allowed to follow interest rate cycles and credit market conditions.
Average investor is 98% water
It is totally separated from the SEC tolerated/ignored/misunderstood speculation-encouraging promotion of Wall Street product hucksters. The Street knows that the average investor is 98% water, simply following the path of least resistance to an unknown market value reservoir.
Market Cycle Investment Management investors know that investing is inherently a contact sport — passivity doesn’t grow the income generating power of an investment portfolio. That requires an understanding of what’s inside, and an appreciation of how to grow the amount of capital at work within the portfolio.
ETF and mutual fund portfolios are low income generators — they grow on speculative greed and disintegrate during market meltdowns… “working capital” is not a familiar concept to the average bulls and bears on Wall Street.
Wealth routinely, and repeatedly, gets wiped out overnight as panic takes hold of inflated ETF and mutual fund prices and brings valuations back to basic realities… and there never was any “base income” to put a floor under declining security prices.
CEF managers, on the other hand, are investors who run their portfolios with an emphasis on the income that they generate — yes, you can even find equity portfolio CEFs with bond-breaking yields. Of course there is market price volatility in the Closed End Fund marketplace… that’s part of the magic.
Where else in the income investing milieu can you buy more of owned corporate and municipal bonds, and government securities without a mark-up induced nosebleed. Just as surely as private, individually managed, Investment Grade Value Stock portfolios should consistently outperform managed-by-the-mob equity mutual funds and ETFs cycle to cycle, income CEFs are a sure fire way to control portfolio “breakage” during cyclical market downturns.
Wall Street would have us believe that market volatility is always a bad thing; that higher prices are always good and lower prices always bad; that passive speculation strategies using multiple ETFs can somehow hedge your “bets” and reduce your pain during downturns. Flattening the curve if you will, until the next upturn… with Mad Portfolio Theory on your side all the way. Since when have bets and hedges become investment terms?
MCIM keeps it simple
Just over a 7% annual gain in working capital (the stuff that produces your income) will double your portfolio working capital (and hence your income) in about ten years. Then, in the “equity bucket”, taking advantage of volatility by buying (very selectively) during the downturns, and selling for reasonable profits (all securities) at every opportunity…. hmmmm
Now throw in one more consideration already within the MCIM formula: never, ever, buy a mutual fund or an index ETF, a NASDAQ stock, an IPO, or a non-IGVSI equity, and maintain at least 30% of your working capital in income CEFs….
Well “big brother” doesn’t allow me to go further. You’ll have to investigate for yourself, at least to find out “what is this working capital thing he keeps talking about…?