By 
Fascinating, aren’t they, these stock markets of ours, with their unpredictability, promise, and daily unscripted drama. But the individual investors themselves are even more interesting. We have become the product of a media-driven culture that must have reasons, predictability, blame, scapegoats, and even that “four letter” word, certainty.
We are becoming a culture of speculators, where hindsight is replacing the reality-based foresight that once flowed through our veins now in real time. Still, the markets have always been dynamic places where investors can earn reasonable returns on their capital on a consistent basis. If one sticks to the basics of the effort and doesn’t measure progress too often with irrelevant metrics, growth in working capital, market value, and spendable income is very likely to occur… without taking risk. improper.
The classic investment strategy is so simple and so hackneyed that most investors routinely discard it and continue in their search for the holy grail of investing: a stock market that only goes up and a bond market that can pay rates. higher interest rates to stable or stable levels. the highest prices. This is mythology, not investing.
Investors who grasp the realities of these wonderful markets (driven by speculation) recognize the opportunities and relish them with an understanding that goes beyond media hype and “yield-enhancing” touts. They have no problem with “uncertainty”; they hug him
In a nutshell, in rising markets:
- When investment-grade equities come close to the “reasonable” target prices you’ve set for them, take your profits, because that’s the “growth” purpose of investing in the stock market.
- When your income securities increase in market value by the equivalent of one year’s interest in advance, take your earnings and reinvest them in similar securities; because compound interest is the safest and most powerful weapon that investors have in our arsenals.
On the other hand, and there has always been a flip side (more commonly feared as a “correction”), replenish your stock portfolio with now lower-priced investment-grade securities. Yes, even some that you just sold weeks or even months ago.
And, if the correction is occurring in your portfolio’s income purpose allocation, seize the opportunity by adding positions, increasing yield and reducing cost basis in one magical transaction.
- Some of you may not know how to add to those somewhat illiquid bond, mortgage, loan, and preferred stock portfolios so easily. It’s time you learned about closed-end funds (CEFs), the great “liquidators” of the bond market. Many high-quality CEFs have a 20-year dividend history to get you excited about.
This is much more than a “buy low, sell high” oversimplification. It’s a long-term strategy that succeeds… cycle after cycle after cycle. Wondering why Wall Street doesn’t spend more time boosting its Managed Tax-Free Income, Taxable Income, and Stock CEFs?
- Unlike mutual funds, CEFs are actually separate investment companies with a fixed number of shares traded on stock exchanges. The share may trade (in real time) above or below the net asset value of the fund. Both the fees and net dividends are higher than any comparable mutual fund, but your advisor will probably tell you that they are riskier due to “leverage.”
- Leverage is a short term loan and is not the same as a portfolio margin loan. It is more like a business line of credit or an accounts receivable financing tool. A full explanation can be found here: https://www.cefconnect.com/closed-end-funds-what-is-leverage
I’m sure most of you understand why your portfolio’s market values rise and fall over time…the very nature of stock markets. Daily volatility will vary, but is generally most noticeable around changes in long-term market direction, income intent, or growth intent.
- Neither your “working capital” nor your realized income need be affected by changes in your market value; if they are, you’re not building a “retirement-ready” portfolio.
So instead of rejoicing at each new stock market rally or lamenting each inevitable correction, you need to take steps that will improve both your working capital and income productivity, while at the same time propelling you toward long-term goals and objectives. term.
- Through the application of a few easy-to-grasp processes, you can chart a course toward an investment portfolio that regularly reaches higher market value highs and (much more importantly), higher market value lows while steadily growing both working capital as income… regardless of what happens in the financial markets.
Left to its own devices, an unmanaged portfolio (think NASDAQ, DJIA, or S&P 500) is likely to have long periods of unproductive sideways movement. You can’t afford to travel eleven years at a breakeven pace (the Dow, from December 1999 to November 2010, for example), and it’s foolish, even irresponsible, to expect any unmanaged approach to be in sync with your goals. personal financial. .
The investor’s creed
The original “Investor’s Creed” was written at a time when money market funds were paying over 4%, so holding “smart cash” in an uninvested bucket of stock was, in effect, a combination of profit while lower share prices were expected. The cash in the income bucket is always reinvested as soon as possible. Since money market rates have become rock bottom, “smart cash” stocks have been placed in CEFs of tradable stocks with average returns of over 6% as a replacement… not so sure, but the compounding makes up for the higher risk on money funds.
He summarizes several basic principles of asset allocation, investment strategy, and investment psychology in a fairly clear personal portfolio management direction statement:
- I intend to be fully invested in accordance with my cost-based, fixed income/capital planned asset allocation.
- Every security I own is for sale at a reasonable target price, while generating some form of cash flow for reinvestment.
- I am pleased that my stock deposit cash position is low, indicating that my assets are working hard to meet my goals.
- I am most pleased when the cash in my capital deposit is growing steadily, showing that I have been capitalizing on all reasonable gains.
- I am confident that I will always be in a position to pursue new capital opportunities that fit my disciplined selection criteria.
If you’re managing your portfolio correctly, your CEF cash + stock position (the “smart cash”) should increase during rallies, as you profit from securities you confidently bought when prices were falling. And, you could be flush with this “smart cash” long before the investment gods blow the whistle on the stock market advance.
Yes, if you go into the investment process with an understanding of market cycles, you will build liquidity as Wall Street encourages higher stock weightings, as numerous IPOs prey on euphoric speculative greed, and as radio hosts and friendly staff boast of his successes in ETFs and mutual funds.
As your hat sizes increase, you will increase your income output by keeping your income purpose allocation on target and removing the growth purpose portion of your earnings, dividends, and interest at a stock-based alternative to hedge fund rates. de minimis money. .
This “smart cash,” made up of realized earnings, interest and dividends, is taking a breather on the sidelines after a series of points. As earnings pile up at stock CEF rates, the disciplined coach looks for sure signs of investor greed in the market:
- Fixed income prices are falling as speculators abandon their long-term goals and look for the new investment stars that are sure to boost share prices forever.
- Boring investment grade stocks are also falling in price because it is now clear that the market will never drop sharply again…particularly NASDAQ, simply ignoring the fact that it is still less than 25% higher than it was almost twenty years ago. years (FANG included).
And the rhythm continues, cycle after cycle, generation after generation. Will today’s managers and gurus be smarter than those of the late 1990s? Will they ever learn that it is the very strength of rising markets that eventually turns out to be their greatest weakness?
Isn’t it great to be able to say, “Frankly, Scarlett, I just don’t care about changes in market direction. My working capital and income will continue to grow regardless, possibly even better when income security prices are falling” .