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There's always been a cliff: 1987, 1999, 2007; there's always been year end "window dressing"

With interest rates stranded at historical lows for nine years now, the stock market side of Wall Street has benefited from a self-created image as the only game in town where reasonable "returns" can be had. Literally millions of retirees, and "savings" account/CD owners have been lured into the upward only (and much more speculative) world of index ETFs, Sector ETFs, and Mutual Funds.

• Note that "returns" are not the same as spending money or income. Portfolios can have returns in double digits while producing no income at all. Wall Street rarely speaks about income. Spending money, in the normal Wall Street model, is obtained by selling securities.

• Clearly, this model breaks down when even the monthly market value gains do not exceed the needed spending money... so when the stock market corrects (and it always corrects), ETF and Mutual Fund investors get clobbered.

Fortunately, while the public propaganda from the "Wizards" preaches "buy stocks at any price", the more conservative (financially) side of the industry quietly and conveniently provides outstanding income production machines. Income and Equity Closed End Funds (CEFs) satisfy the income and safety-of-principal needs of millions of (eventually much safer) investors.
With income purpose securities, the income almost never changes as market values fluctuate. In two of the three major market meltdowns referred to above, prices of income producers actually stabilized or moved higher... in all three, the income kept on flowing.

So an income portfolio generating 7% potential spending money at a $300,000 market valuation will generate the same dollars of income if values fall to $250,000 (negative "returns") or if the value rises to $400,000 (positive "returns").

Yes, this is true even if you spend the income! Experienced investors understand that if they spend 70% or less of their income and reinvest the difference:

• their annual income will continue to grow as their market value fluctuates, and
• that it will actually grow even faster if the market value decreases

This latter group, our group of investors, are the Market Cycle Investment Management (MCIM) process users who choose not to follow the lemmings ever closer to the next "cliff".

There's always been a cliff

So the forces (other than the "buy high" greed mentality of Wall Street) that have produced this decade of equity only investing by the masses are:

• historically low interest rates from individual fixed income securities and income funds, and
• Wall Street's reluctance to promote their own first rate income products that, for every one of the past ten years (20 or more years in many cases), have produced a remarkably steady stream of (6% to 8%) spending money... plus periodic capital gains opportunities.
• misguided government regulations that preclude the use of income purpose CEFs in employer sponsored retirement plans (401ks, etc)

The average annual yield on the majority of taxable income CEFs used in MCIM portfolios has actually exceeded the average annual rise in the S & P 500! Repeat that over and over until your light bulb goes "click".

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There's always been year end "window dressing"

2017 has been one of the best years in stock market history. What do you think the continuing employment prospects would be for an institutional money manager who is not fully invested in the best stock market performers at year end? What about for the guy who owns a large number of retailers or (believe it or not) energy companies?

Year end window dressing is a process used by institutional money managers to make themselves look really smart to their big corporate clients. They buy up all the hottest performers and shed anything that has fallen in price significantly... thus producing a "brilliant" year end portfolio picture.

The window dressing has been going on since early November... and even more money is leaving individual income purpose securities in anticipation of future interest rate hikes.

• Note this backasswards emphasis from an industry focused on the market value of fixed income securities as opposed to the higher income that the lower prices produce.

All of this plays right into the hands of MCIM investors (like us!?!):

• Lower income security prices mean higher yields from new purchases. Income CEF investors can now either add to existing positions to increase yields and reduce cost basis per share, or diversify their portfolios with different CEFs. It's magic.
• The equity portion of our portfolios overcomes the minimal number of individual equity opportunities by taking advantage of the numerous high quality closed end equity collections that remain within a comfortable price range... while paying dividends averaging well above 6% per year. Even more magic.

There's always been a cliff; there's always been year end "window dressing"; there's been a solution since 1970, when MCIM was developed.)

The investment plan for now is fairly simple, and pretty much the same as it has always been. Take the steps necessary to benefit from both market corrections and rising interest rates.
We'll continue to compound our excess of income over expenditures to assure continued growth of income. Higher interest rates are the best things that can happen, not only for us directly, but also for the income product providers. They should be able to find higher yielding "paper" to add to their managed portfolios.

Yes, income CEF rates will rise (eventually) as higher interest rates come on stream.

• We'll continue to be true to our individual equity buying disciplines (the QDI), and quick to take reasonable profits. Equity CEFs will keep us in the market, benefiting from a continued run up in stock market prices.

There's always been a cliff; there's always been year end "window dressing"and MCIMers have always been able to make this important statement:

"neither a stock market crash nor rising interest rates will have a negative impact on my income production; in fact, it is likely that I will be able to grow my income even better during either scenario"

• Read the Investor's Guide to MCIM

 

Steve Selengut
Author of: "The Brainwashing of the American Investor"
http://retirementreadyincomeprograms.com

 

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