Economics

What if the Markets Correct Tomorrow?

Most of you have been smiling this year as your monthly statements have been boasting new all time high market values, growing income streams, and unusually high profit taking levels in normally defensive securities like Closed End Income Funds.

What if the stock market starts to correct tomorrow? and what if it takes the interest rate sensitive, income purpose, market along with it?

Most of you have seen this statement before, and with the portfolio fine tuning that has been taking place in recent months, it might be helpful for my clients to consider it once again:

Neither a stock market correction nor higher interest rates will have a negative impact on either your retirement income or on the long term viability of the securities in your portfolio; actually, it is likely that income levels will increase.

Equity Markets

All reasonable profits in both individual equities and Equity CEFs are being taken and reinvested in what has recently become a larger universe of Investment Grade Value Stocks (IGVSI)... and smaller positions in "other" experienced Equity CEFs.

CEFs afford an excellent opportunity to take full advantage of a bubbling stock market. They are managed portfolios, and they distribute both trading profits and dividends to shareholders while diversifying the risk. I'm guessing that the average dividend of portfolio equity CEF holdings is above 6%. Plus:

 

It's easy to add to positions at lower prices to both reduce the cost per share and increase the yield on portfolio positions... hundreds of individual securities at a time!

Income Securities

Income CEFs, both taxable and tax free have grown to their highest levels since the all time highs achieved late in 2012... the taxable variety has been particularly strong, allowing for unusually frequent "one-year's-interest-in-advance" profit taking. Still, income yields remain high and portfolio income gains have been exceptional.

To assure that these income gains continue, all positions (six in total) paying less than 6% have been culled from portfolios... and replaced with positions paying approximately 2% more. The length and breadth of the income CEF rally has expanded the number of positions being held in all portfolios, but diminished their size.

This strategy is purposely defensive, assuming that the cyclical nature of markets will prevail. Smaller positions over a broad spectrum of income CEFs will allow for cost basis reductions and higher effective yields if the market falls... and more profits to reinvest if the rally continues.

So smile, and tell your golf buddies, kids, and grand kids:

Neither a stock market correction nor higher interest rates will have a negative impact on either your retirement income or on the long term viability of the securities in your portfolio; actually, it is likely that the income levels will increase... and more robustly the longer a correction lasts.

They won't believe you...

 

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