"When the moon is in the Seventh House, And Jupiter aligns with Mars..." the 5th Dimension
Monday, 7-11 (lucky numbers?), may well have been the day of alignment for the financial markets. Both the IGVSI and the S & P 500 closed above their May 21st 2015 highs, achieving levels that income CEFs broke through in early March.
Income purpose CEFs were at a five-year high (in the seventh house); Jupiter (the S & P) and Mars (the IGVSI) could possibly realign at an All Time High level.
Clearly somewhat less than an "Age of Aquarius", but it was one of those unique moments in financial markets' time that we could look at quality based investing, income purpose investing, and broad equity speculation on a somewhat equal plane.
What kind of strategy makes sense when all securities' prices are at their highest levels... ever!?
What expectations should you have about future price movements; what do you do to help those market value high smiles become permanent; do higher prices help or hinder your ability to grow portfolio income?
Regardless of what happens next, "peace can guide your retirement plan(et)"...particularly when your financial operating plan is "in sync" with the cyclical nature of all investment markets.
NOTE: The "regardless of what happens next" was written less than a week ago, when the continuing implementation of the strategies outlined below took every available working moment. I'm guessing that the last few weeks have been the most transaction intensive in nearly 40 years of investment management.
NOTE 2: most of you probably know what I mean when I use terms from my books and articles... I will no longer explain them in the body of new material... all can be Googled if you add "- Selengut" to the search.
---------------------------------------
Six simple "Brainwashing Book" principles that are implemented when the "Surf's Up" can be bullet pointed... and they should answer the questions raised above:
- Buy slowly, take profits quickly; let no reasonable profit go unrealized
- There's no such thing as a bad profit, or a "good" loss; some losses are inevitable
- Three 7's beats two 10's... particularly "quickies"
- There has never been a rally/correction that has not succumbed to the next correction/rally
- Never throw your profits under a "tax code" or "commission" bus
- When your market value is at an "ATH", begin to shed your most disappointing or non productive positions... downgraded issues first. This brings Working Capital numbers in line with portfolio productive reality.
How do we continue to profit from the Stock Market rally, in the face of a shrinking buy list, and while realizing all of our "reasonable" profits?
One of the (many) things that I have never understood about investor behavior is the rush to make equity commitments at the highest prices in the history of mankind. How many times do cyclical lessons need to be experienced before they become learned?
For fourteen of the past fifteen months, stock prices, as measured by the S & P 500, have been within 5 to 7 percentage points of all time high levels; similarly, the IGVSI (even though it includes a higher proportion of energy sector companies) has been hovering at nearly ATH levels the entire time.
After four consecutive daily ATHs, the July 15th "watchlist" contained only eight IGVSI companies within MCIM buying range... less than 2.5% of the equity selection universe.
The "Investor's Creed" suggests that abundant portfolio "smart cash" is a "happy place", but the concept was developed when money market rates allowed us to "compound" our income at acceptable interest rates.
- Equity CEFs, about two dozen of them, have filled the gap. They are mostly well diversified, sometimes partly "balanced", sometimes global, sometimes sector specific, and always actively managed, portfolios.
- They produce total income far in excess of historical money market rates and common stock dividends... higher, even, than the income produced by many income closed end funds.
Equity CEFs have virtually replaced the Money Market Fund and have enhanced the compound earnings capability of the MCIM Equity Asset Allocation Bucket. They are as "tradeable" as individual equities and not as volatile... but that's just half of the story.
- Equity CEFs typically pay the total of their capital gains distributions toward the end of each year... (get ready to switch on the light bulb). Let's say you've had a successful trading year... I'm guessing that MCIM portfolios take profits on dozens of different stocks each year.
- So have those Equity CEF managers... and even though you are having difficulty finding new equity positions for your portfolio, your friendly CEF managers aren't as fussy, and will be sharing their trading profits with you come December and January!
- Yes, Equity CEF content is not as exclusive as the IGVSI, but cyclical price history and years of experience show that the income vs. risk relationship is suitable for MCIM portfolios... particularly during extended rallies.
------------------------------------------------------------
How do we cope with shrinking reinvestment yields, as we take our profits in a frothy income CEF environment?
If you "forgot" to take your profits in Income CEFs before Tuesday, particularly the tax exempt variety, you missed the best "compound earnings growth" opportunity since November 2012...
- We all know people who hate to pay taxes. In 2012, I was nearly fired by one, when I took advantage of the rally in tax free CEFs. This year I just watched (asked "are you sure?"), and I'm shaking my head as I type.
- On Monday, the portfolio contained approximately 20 positions with long term profits ranging from 8% to 12%.... thousands of dollars. Today there is one. As I said in "Brainwashing"... "send me your unloved or unwanted capital gains; I'll pay your taxes (max of $.35 per dollar), and my own on the remaining $.65."
The Income CEF marketplace is every bit as cyclical as the stock market, but the undulations are mainly the result of changing interest rate expectations; the cycles are generally of a smaller range and a longer duration. The two recent cycles are shown in the chart found here, but please note that the financial crisis was not a "typical" cyclical low: http://www.sancoservices.com/Sanco/MCIMvsSP500.xls
Only a year ago, average yields on tax free CEFs approached 6.5%; taxable, roughly 2 points higher. Monday, tax free yields were in the low 5% range...
Income CEFs generally pay monthly income (ideal for retirement programs), and the MCIM profit-taking rule-of-thumb is simply this. Never say "no" to "one year's interest in advance". The math is not difficult, and so long as I can get the same or (preferably) more income from a different CEF, the profit should be taken.
- Yes, you are correct in thinking that interest rate expectations raise and/or lower all rate sensitive securities... but not in equal amounts for specific shares. Neither prices nor yields are identical throughout the market.
- So, if I take a 6.15% net/net profit on 1,000 shares of a CEF with a current yield of 6.0% and I reinvest it in 500 shares of a CEF yielding 6.4% and another 400 shares of a CEF yielding 7.2%, what have I accomplished? I've increased the yield on an increased amount of Working Capital.
But I've done something even more important in the process, and this is the magic of income investing with CEFs. By increasing the number of positions and decreasing the number of shares in each, I've facilitated the process of growing income per share and reducing cost basis per share when prices eventually fall...
Because, there has never been a rally/correction that has not succumbed to the next correction/rally. And, by the way, capital gains in income CEF portfolios are often held for distribution around year end...
----------------------------------------------
And what has this taught us about the three types of investment programs, whose cycles were in "peak" alignment last Monday?
It brings home the point that portfolios of IGVSI companies, balanced with well experienced managed CEF portfolios "perform" at least as well as unmanaged, more speculative programs, while generating dependable multiples of the income provided by the most popular Wall Street recommended products.
With this in mind (the availability of dependable income around 6%),is it as strange to you as it is to me that the most popular "income" products offered to 401k participants are a group of Vanguard funds paying less than 2%?
OK, back to the implementation... you can obtain a copy of the "Brainwashing" book here: http://retirementreadyincomeprograms.com/Inv/Book.cfm