Just the other day, I was talking about “preparing for retirement” with a small group of people, several of whom were already retired. None of them owned, had not even heard of, fixed capital or income funds (CEF) … vehicles that I have been using in professionally managed portfolios for decades.

Readers are supposed to have read the six question-and-answer questions covered in part one.


7. Why does it seem like CEFs, public REITs, and master limited companies are being ignored by Wall Street, the media, and most investment advisers?

All three are income producers, and once they are “out there” in the market, they operate like stocks … on their own fundamental merits and at a price that depends solely on supply and demand. Unfortunately, income programs have never attracted the kind of attention and speculative zeal that has existed for any kind of growth vehicle.

Income mutual funds and ETFs can create stocks at will, maintaining a market value equal to the NAV (net asset value). But the sole purpose of each is to increase market value and produce a comparable “total return” number in the stock market … income is rarely mentioned in their product descriptions.

An income guarantee can stay in the same price neighborhood for years, only spitting out 6-10% in income to fund a college education, a retirement lifestyle, and world travel. But most investment advisers, ETF passivists, and mutual fund managers rate themselves based on the annual “total return” their portfolios or indexes produce … income programs simply don’t generate year-end trips or six-figure bonuses.

  • I myself was fired a few times, just before the dot-com bubble burst, because my 10-15% “returns” on high-quality stocks and income producers simply couldn’t compete with the speculative fever. which propelled the NASDAQ to 5000. ..

  • But when markets crashed in 2000, the “without NASDAQ, without IPO, without mutual funds = no problem“The operating creed produced significant growth and revenue.

Another problem is broker / advisor compensation at Wall Street firms … entirely based on the sale of proprietary products and “investment committee” recommendations. There is no place for slow growth based on high-quality stocks that pay dividends and funds closed for income purposes.

Finally, the myopia of government cost performance and market value precludes any inclusion of CEF in 401k and other employer sponsored investment programs. Vanguard’s VTINX Retirement Fund pays less than 2% after a minimum fee; Hundreds of much better diversified CEFs pay 7% and better after 2% or more in fees. However, the DOL, FINRA, and the SEC have somehow determined that 2% of spending money is better than 7% in what they have incorrectly labeled “retirement income programs.”

  • You will never see a CEF, even stocks or balanced portfolio CEF, in a 401k stock pick menu. There are also unlikely to be public REITs and MLPs.

8. How many different types of CEF are there? what investors pay for them; And are there penalties for trading them frequently?

CEFConnect.com lists 163 tax-free funds, 306 taxable, 131 US stocks, and 204 non-US stocks and others.

A partial list of types and sectors includes: Biotech, Commodities, Convertible Bonds, Hedged Calls, Emerging Markets, Energy, Stock Dividends, Finance, General Stocks, Government Securities, Healthcare, High Yield, Limited Duration Bonds, MLPs, Bonds Mortgages, Multiple Sector Income, Diversified National Municipal, Preferred Stock, Real Estate, Senior Loans, 16 Different Single State Municipal, Tax-advantaged Stocks, and Utilities.

CEFs are purchased the same way and at the same cost as individual stocks or ETFs, and there are no additional penalties, fees, or charges for frequently selling them … they are traded for free on managed accounts, pay only, and always pay more income than their peer ETFs and mutual funds.

9. What about DRIPs (dividend reinvestment programs)?

There are at least four reasons why I choose not to use DRIP.

  • I don’t like the idea of ​​adding positions above the original cost base.

  • I don’t like to shop when the demand is artificially high.

  • I prefer to pool my monthly income and select reinvestment opportunities that allow me to reduce the cost of the position and increase performance at the same time.

  • Investors rarely join portfolios in declining markets; just when I need flexibility to add new positions.

10. What are the most important things investors need to understand when it comes to investing in income?

Actually, if an investor can think of just three things, they can become a successful income investor:

  • The market value change has no impact on income paid and rarely increases financial risk.

  • The prices of rental securities vary inversely with expectations of interest rate change (IRE)

  • Income purpose securities should be evaluated based on the amount and reliability of the income they produce.

Let’s say thirty years ago we bought a 4.5% IBM bond, a 2.2% 30-year treasury note, and 400 shares of a 5.7% P&G preferred stock, all at par, and we invested $ 10,000 in each one. Annual income of $ 1,240 has been accumulating in cash.

In this time period, interest rates have ranged from a high above 12% to recent lows around 2%. They have made no less than fifteen significant changes of direction. The market value of our three “fixed income” securities has been above and below the “cost basis” dozens of times, while the portfolio “working capital” (cost basis of the holdings of portfolio) grew every quarter.

  • And each time the prices of these securities fell, their “current performance” increased while paying the same dividends and interest.

  • So why does Wall Street make such a fuss when prices drop? Why indeed.

Over the years, we have accumulated $ 37,200 in dividends and interest; the bond and treasury note matured at $ 10k each, and the preferred stock still pays $ 142.50 per quarter.

So our cash account is now $ 57,200 and our working capital has risen to $ 67,200 while we haven’t lifted a finger or spent a moment worried about fluctuating market values. This is the essence of investing in income and precisely why it doesn’t make sense to consider it in the same way as investing in stocks.

Investors should be reprogrammed to focus on producing income from investments for income purposes and to make reasonable returns when produced by securities for growth purposes.

  • What happens if we reinvest the income each quarter in similar values? Or you sold the securities when they went up 5% or so … and reinvesting income in portfolios of similar securities (CEF), rather than individual entities, for diversification and higher performance?

  • Assuming only $ 500 of profit per year and an average interest rate of 5%, the “working capital” of the portfolio would increase to $ 168,700 … a profit of approximately 462%. The income would be $ 8,434 … a profit of 680%

I hope these conservative income figures get you a little more excited about having a serious allowance for income purposes in your “eventual retirement income portfolio” … particularly income CEFs. Don’t let your advisor convince you; Investments in the stock market are not designed to do income work … reliably, over the course of our retirement life.

  • CEFs allow anyone to invest in diversified portfolios of fixed income securities and, by design, always at higher security rates than individual ones.

  • CEFs provide a unique liquid entity that allows investors to benefit from price changes caused by IRE in any direction. Yes, that’s what I meant.

eleven. Why take a profit if the income of a security has not changed?

Compound interest is the “holy grail” of income investing. A 5% profit made and reinvested today will work much harder than the 5% received in the course of the next few months. Also, when interest rates are rising, earnings opportunities are slim and the income can be used more productively than in stable or declining interest rate environments.

So, let’s say we have a “limited duration” bond CEF that yields 6%. We have held it for 8 months, so we have already received 4.5% and we can sell it today at a 4% profit. So we can get a nifty 8.5% (actually a bit more since we’ve reinvested previous earnings), in just eight months.

Then we can benchmark against revenue for a new CEF yielding 6% or more and expect to do a similar trade sometime soon with another of our holdings.

A second reinvestment strategy is to add to multiple positions that are priced below the current cost base and outperforming the CEF that we just sold. This is a great way to improve the “current performance” of existing positions while ensuring that you have more opportunities to profit when interest rates drop.

12. How does “working capital” keep increasing?

Total working capital and the income it produces will continue to grow as long as the income exceeds all withdrawals from the portfolio. Note that capital losses have no impact on income if profits can be reinvested at a higher “current” yield … but working capital is temporarily affected.

Portfolios are kept on their asset allocation “track” with each batch of monthly reinvestment decisions, but the larger the revenue purpose “segment”, the easier it is to ensure consistent growth in both revenue and equity. of work.

13. What is preparation for retirement income?

It is the ability to make this statement, unequivocally:

  • Neither a stock market correction nor an increase in interest rates will have a negative impact on my retirement income. In fact, either scenario is more likely to allow me to increase both my income and working capital even faster.

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