The Record Of Investing In U.S Based Stock Mutual Funds Investment Opportunity Times Two – Or Is It Four

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Investment Opportunity Times Two – Or Is It Four

As of March 23, 2018, the S & P 500 (at $2,588.26) was down roughly 10% from its January 26, 2018 all time high of $2,872.87, and down about 3.2% for the year, presumably in anticipation of an imminent trade war.

Additionally, interest rate sensitive securities were trading near 52 week low levels as bond and other fixed income speculators shed inventory in anticipation of at least three 2018 interest rate hikes.

Obviously, a market scenario like this is challenging for:

  • Major market participants (institutional investors) whose bond inventories are shrinking in price.
  • Stock market speculators in much too high PE and low or no dividend equities.
  • Income focused investors (retirees and “soontobes”) who hold positions in illiquid individual fixed income securities.
  • 401k savings account holders whose pooled investment portfolios are, by design, much too heavily invested in equities.

But, it is a perfect storm of opportunity for Market Cycle Investment Management (MCIM) portfolios. The MCIM process focuses only on fundamentally sound, S & P B+ or better ranked equities of profitable, dividend paying, companies (Investment Grade Value Stocks). No individual stocks are purchased until they are trading 20% below their 52 week highs.

MCIM portfolios are diversified in several ways, and every security pays either dividends or interest. New issues, NASDAQ companies, and Mutual Funds have no place in MCIM portfolios, which also have strict profit taking disciplines that eliminate the pain of watching major profits slip away during corrections. Additionally, “cost based” asset allocation precludes the need for portfolio “re-balancing” while assuring annual income growth with a 40% or higher income purpose asset allocation.

While markets climb to record high levels, the lack of individual equity investment opportunities is ameliorated with the use of equity Closed End Funds (CEFs). These are managed, classically diversified, “real time” tradeable, portfolios covering most market sectors while providing much higher than normal (after expenses) income.

In the income purpose “bucket”, well diversified income CEFs (both taxable and tax-free) are used to assure higher than normal income from all types of generally illiquid securities… securities which (in CEFs form) magically become available in totally liquid form.

How have IGVS equities and CEFs fared in the three major meltdowns of our lifetimes?

  • In 1987, IGVS equities were the first to recover, and there were no company failures or dividend cuts; few CEFs existed at the time and they were not a major portfolio holding, but individual interest rate sensitive securities rallied as interest rates were lowered.
  • In 1999, IGVS equities and most CEFs did not “bubble” along with the NASDAQ, and rallied strongly during the flight to quality that followed the dot-com disaster. “No NASDAQ, no new issues, no Mutual Funds” was a winning credo then, as it should be in the next significant correction.
  • In 2008, everything tanked and two or three financial services IGVS companies were crushed in the government witch hunt. Overall, there were few dividend cuts in equities, as IGVS companies rallied from the bottom at a slightly faster pace than the S & P 500 through 2014. Income CEFs, however, outperformed the entire stock market from 2007 through late 2012, while maintaining their dividends until 2016 or so, when tax free CEF yields began to fall.

Thus, while some managed portfolios may have inherent quality, diversification, and income concerns during corrections, MCIM portfolios have new investment opportunities. While some investment portfolios must deplete capital to pay monthly income to retirees, the vast majority of MCIM portfolios have excess income that is used to grow capital in any market scenario.

Four varieties of investment opportunity exist as this is being written:

  • The number of IGVS equities falling 20% below 52 week high levels is growing.
  • There are approximately forty primarily equity CEFs, representing a wide variety of market sectors, with current yields between 7% and 9% after all internal fees and expenses.
  • There are no less than sixty-one taxable income CEFs, representing a wide variety of security types, with current yields between 7.5% and 9.5% after all internal fees and expenses.
  • There are at lease thirty-one federally tax free income CEFs paying between 6% and 6.6%, after all internal fees and expenses.

For your long term portfolio health, make sure that you take advantage of them… this time. It’s been ten years since the last significant market correction, and it just makes sense to use an investment medium that provides the necessary fuel to add to positions at lower prices. The clock is ticking.

The “add to at lower prices” approach is particularly effective with CEFs, where every addition:

  • Reduces your cost basis, speeding the return of profit taking opportunities.
  • Increases your dividend yield on the security, and.
  • Increase your annual portfolio income.

What’s that old Boy Scout motto? Right…

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