The following is a superficial, Wall Street style, analysis of two hypothetical portfolios starting out at the turn of the century... roughly 17.25 years ago.
Unlike MCIM portfolios, these are completely unmanaged (buy and hold as opposed to buy on weakness and take reasonable profits). The "growth" purpose portfolio is examined on a purely market value basis through its recent (March 2017) highs.
The "income" purpose portfolio simply accumulates the income and adds it to the beginning working capital at the end of the period.
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So, with the Stock Market indices near record highs, and fixed income prices weak because of impending higher interest rate rises, most investors would assume thatthe stock market portfolio has outperformed the (much less risky) income purpose portfolio by a wide margin.
How wrong do you think that assumption is?
The numbers below are based on two $100,000 portfolios fully invested on December 31st 1999. The market value growth purpose portfolio was invested one third each in the three major indices; the income purpose portfolio was invested 25% each in four Closed End Funds (CEFs)... two taxable and two tax free.
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Since the end of 1999, The Dow Jones Industrial Average has moved from 11,497 to a high of 21,115... a gain of roughly 4.85% per year. The S & P 500 has grown from 1,469 to 2,396, gaining some 3.66% per year. The NASDAQ has risen from 4,069 to a high of 5,904 for a gain of about 2.58%. Not nearly as special as Wall Street would like you to believe.
A combined portfolio (one third invested in each) would have risen from $100,000 to $165,299 for a 21st century market value gain of 3.79% per year. The average annual dividend yield on the portfolio would have been somewhere below the 1.86% that is being generated today.
If you include the income generated by the tracked companies (it is actually in there already), a combined 5.65% annual growth rate is what you wind up with. Note that your potential retirement spending money remains 1.86% on a working capital of... right $100,000
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Investing the same $100,000 in two taxable income and two tax free income CEFs produced significantly better performance with considerably lower risk. (Note that, for compliance reasons, I have scrambled the symbols and inserted a random "X" in the information provided below.)
· CPXM, a Pimco portfolio of 400 corporate bonds paying an average 9.48%
· SDMX, a Dreyfus portfolio of 150 municipal bonds paying an average 6.63%
· XFPD, a Flaherty-Crumrine preferred stocks paying an average 7.53%
· VXEN, an Eaton Vance municipal bond portfolio paying an average 6.49%
NOTE: The average 7.53% income was paid in monthly installments, without a miss, during the period; capital gains distributions and year end extra dividends are not included in the analysis.
This portfolio, comprised of roughly 1,000 individual income purpose securities, (theoretically, every security inside each portfolio had less "financial risk" than every common stock included in each of the equity indices) generated approximately $130,000 dollars of income during the period.
This produced a March 2017 portfolio working capital figure of $230,000
Yes, as I'm sure you've realized, this figure is seriously unrealistic because it excludes the reinvestment and compounding of the monthly earnings. At 7.00% paid annually, this $100,000 would have become at least $316,000 in 17 years... nearly twice the gain in the stock market averages.
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No, I'm not at all suggesting that investment portfolios should avoid the stock market... far from it. But I think a study such as this (during a period that saw two major stock market corrections and one income CEF market downturn) points clearly to the significance of these MCIM foundation strategies:
· Always have at least 40% of working capital invested with an income purpose
· Invest only in high quality, profitable, dividend paying equities
· Only buy stocks when they have fallen at least 20% from their 52 week highs
· Let no reasonable "targeted" profit go unrealized... in either security class
There's another hidden gem of information in the equity numbers presented above, one likely to have elicited an "ah ha" from serious investors (as opposed to speculators) .
· The Large Cap DJIA outperformed the not so high quality S & P 500 by 33%
· The S & P 500 outperformed the extremely speculative NASDAQ by 42%
· Investment Grade Value Stocks (used exclusively in MCIM) have even higher selection quality parameters than the DJIA
And remember this MCIMers: if the market tanks tomorrow and interest rates continue to rise, it is entirely likely that the income produced by your portfolio will continue unabated... or increase, even.
What's MCIM? Google: "MCIM and IGVSI Stocks"
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