Describe An Average Day In The Life Of 10-Year-Old You More That Dad Forgot To Tell You About Income Investing: Q & A

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More That Dad Forgot To Tell You About Income Investing: Q & A

Just the other day, I was discussing “retirement readiness” with a small group of people, several of whom were already retired. None of them own, or even hear of, equity or income closed-end funds (CEFs)…I’ve been using these vehicles in professionally managed portfolios for decades.

It is assumed that the reader has read the six essay questions covered in the first part.

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7. Why do CEFs, Public REITs and Master Limited Partnerships seem to be ignored by Wall Street, the media and most investment advisors?

All three are income generators and once they are “out there” in the market, they trade like stocks… based on their fundamental value, the price is entirely determined by supply and demand. Unfortunately, revenue schemes have never garnered as much attention and speculative enthusiasm as any growth tool.

Income mutual funds and ETFs create shares at will, holding a market value equal to NAV (net asset value). But each one’s sole purpose is to increase market value and generate “total return” numbers comparable to the stock market… income is rarely mentioned in their product descriptions.

Income-oriented securities may stay in the same price range for years, just taking 6% to 10% of income to fund college educations, retirement lifestyles, and world travel. But most investment advisors, ETF passives, and mutual fund managers are rated based on the annual “total return” their portfolios or indexes generate… income plans don’t generate year-end travel and six-figure bonuses.

  • Just before the dot.com bubble burst, I myself got fired a few times because the 10% to 15% “returns” I got from quality stocks and yield producers couldn’t match what pushed the NASDAQ to 5000 The speculative fever of points is counterbalanced. ..

  • But with the market crash in 2000, “No Nasdaq, no IPO, no mutual Funding = no problem“Operating Credo has generated significant growth and revenue.

Another issue is broker/advisor compensation at Wall Street firms…based entirely on selling proprietary products and “investment committee” recommendations. There’s no room for slow growth based on high-quality dividend-paying stocks and income-oriented closed-end funds.

Finally, the myopia of government costs and market value performance hinders the inclusion of CEFs in 401k and other employer-sponsored investment plans. Vanguard’s VTINX retirement fund pays less than 2% after a minimum fee; hundreds of more diversified CEFs pay 7% or more after a fee of 2% or more. However, DOL, FINRA, and the SEC somehow determined that 2% payouts are better than 7% in what they mislabeled as “retirement income plans”

  • You will never see a CEF, or even a stock or balanced portfolio CEF, in the 401k securities selection menu. Public REITs and MLPs are also unlikely to exist.

8. How many different types of CEFs exist; what do investors pay for them; are there penalties for frequent trading?

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

A partial list of types and sectors includes: Biotech, Commodities, Convertibles, Covered Calls, Emerging Markets, Energy, Dividends, Financials, Common Equity, Government Securities, Health, High Yield, Limited Maturity Bonds, MLPs, Mortgage Bonds , multisector income, diversified state municipals, preferred stock, real estate, senior loans, 16 different single state municipals, tax-advantaged stock and utilities.

CEFs are bought the same way and cost the same as individual stocks or ETFs, and there are no penalties, fees, or extras often associated with selling them…they trade for free in custodial, fee-only accounts, and always pay more than their ETF and mutual fund counterparts much income.

9. What about DRIP (Dividend Reinvestment Plan)?

I choose not to use DRIP for at least four reasons.

  • I don’t like the idea of ​​adding to a position on top of the original cost.

  • I don’t like buying when demand is artificially high.

  • I prefer to pool my monthly income and choose reinvestment opportunities that allow me to lower my position’s cost basis while increasing my yield.

  • Investors rarely add to their portfolios during market downturns; that’s when I need the flexibility to add new positions.

10. What is the most important thing an investor must know when it comes to income investing?

In fact, an investor can be a successful income investor if he focuses on only three things:

  • Changes in market value have no effect on the income paid and rarely increase financial risk,

  • Income guarantee price is inversely proportional Interest Rate Change Expectations (IRE)

  • Securities for income purposes must be evaluated on the basis of the volume and reliability of the income they generate.

Let’s say, thirty years ago, we purchased 4.5% IBM bonds, 30-year 2.2% Treasury bills, and 400 shares of 5.7% Procter & Gamble preferred stock, all at par, with an investment of $10,000 each. Annual income of $1,240 has been accumulating in cash.

During that time, rates have ranged between highs above 12% and recent lows around 2%. They made at least fifteen major directional changes. The market capitalizations of our three “fixed income” securities were above and below the “cost basis” dozens of times, while the portfolio “working capital” (the cost basis on which the portfolio was held) grew every quarter.

  • Whenever the prices of these securities move lower, their “current yield” increases, paying the same dividends and interest.

  • So why is Wall Street making such a fuss when prices fall? Why indeed.

We’ve accrued $37,200 in dividends and interest over the years; bonds and treasuries mature at $10,000 each, and 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 without us lifting a finger or spending a moment worrying about market value fluctuations. That’s the nature of income investing, and exactly why it doesn’t make sense to treat it the same as equity investing.

Investors need to reframe to focus on income generation from income-purpose investments and realizing reasonable profits when growth-purpose securities are produced.

  • What if we reinvested our income in similar securities each quarter? Or sell a security when it’s up 5% or so… and reinvest the proceeds in a portfolio of similar securities (CEFs) rather than a single entity, For diversification and higher returns?

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

I hope these conservative income numbers get you more excited about making serious income purpose allocations in your “final retirement income mix”…especially income CEF. Don’t let your mentor talk you out of it; the purpose of stock market investing is not to do income work… reliably, in our retirements.

  • CEFs allow anyone to invest in a diversified portfolio of fixed-income securities and are designed to consistently exceed individual security interest rates.

  • The CEF provides a unique liquidity entity that allows investors to benefit from price changes in either direction caused by the IRE. Yes, that’s what I’m trying to say.

11. Why take profits if there is no change in the security’s income?

Compound interest is the “holy grail” of income investing. A 5% profit realized and reinvested today will be a lot harder than a 5% profit received in the next few months. Furthermore, when interest rates are rising and opportunities for profit are scarce, earnings can play out more efficiently than in a falling or stable environment.

So, let’s say we have a “finite-maturity” bond CEF that yields 6%. We held it for 8 months, so we have received 4.5%, we can sell it today for 4% profit. So we can achieve a nice 8.5% in just eight months (actually a little more than we reinvested our prior gains).

We can then use the yield to shop around for a new CEF yielding 6% or better, and hopefully soon do a similar trade with another stock we own.

The second reinvestment strategy is to add several positions that are priced below the current cost basis and yield higher than the CEF we just sold. This is a great way to increase the “current yield” of an existing position while ensuring you have more opportunities to take profits if the rate cycle turns down.

12. How to keep “working capital” rising

As long as income exceeds all withdrawals from the portfolio, total working capital and the income it generates will continue to grow. Note that capital losses have no effect on income if earnings can be reinvested at a higher “current” rate of return…but working capital does take a temporary hit.

Each batch of monthly reinvestment decisions keeps the portfolio on its asset allocation “track,” but the larger the income purpose “bucket,” the easier it is to ensure steady growth in income and working capital.

13. What is retirement income provision?

It is this ability to make such statements unambiguously:

  • Neither a stock market correction nor rising interest rates will negatively affect my retirement income. In fact, both of these scenarios are more likely to lead to faster growth in my revenue and working capital.

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