Save Money By Taking Care of Your Health Issues

There are a few different ways to think about saving money. Maybe you want to put more aside from your typical paycheck. Perhaps you want to cut back on the number of expensive groceries that your purchase. Maybe you’re thinking about getting rid of some of the luxuries that you spend money on that aren’t specifically necessary to living a satisfying existence. But beyond those typical perspectives, there is another way to think about saving money, and that is by taking care of your health issues as a type of preventative maintenance.

Think about all the ways that you can save money by paying attention to health issues and dealing with them before they get expensive. You can make sure that you sign up for the right health insurance to keep those costs down. You can invest money in your eyes – figuring out what surgeries you can get or paying attention to different eye health options can have a tremendous amount of cost savings over the years. And, you can have good nutrition and exercise habits, thereby preventing some of the expensive conditions that can happen later on in life from not taking care of yourself.

Signing Up for the Right Health Insurance

It can be difficult these days navigating the healthcare industry. But, if you want to keep costs somewhere manageable, it’s essential that you sign up for the best health insurance plan that suits your needs. You have to pay attention to things like premiums and deductibles, and then you can look into details like co-pays, out-of-pocket expenses, and other items like that. You want to find the right balance of paying for insurance so that costs further down the road don’t exceed what you’re capable of paying.

Investing In Your Eyes

How much money do you typically spend on your eye health? If you wear glasses or contact lenses, that number can seem like it gets excessively high. If you talk to an eye care specialist, you may find out that there are options for you to reduce some of these costs over time. There are different surgeries that doctors can perform on your eyes that can make it so that you don’t have all of the expenses associated with eyeglasses and contacts anymore. Talking to a specialist for a free consultation is a good step in the right direction. You can save thousands of dollars over the years by taking care of your eyes in this way.

Keeping Good Nutrition and Exercise Habits

Have you ever noticed that when people get older, their health appears to deteriorate? If you talk to them, they speak about how many bills they have to pay and how expensive it is to take care of the health conditions that they have. They say that hindsight is 20/20, but the fact is, you know that your health is going to get worse as you age. Because of this, if you want to reduce the expenses that are naturally going to occur, then you have to start paying attention to your nutrition and exercise habits now! No matter how old you are, if you have a goal of achieving healthy food and exercise habits, that will pay off as an incredible return on your investment later.

Ed Rempel Org

What is The Cash Flow Dam?

What Is The Cash Dam and How Does It Work?

 The Cash Dam (sometimes referred to as a “cash flow dam”) is a simple but powerful concept, and it’s an especially attractive option for those who are familiar with the Smith Manoeuvre or other tax minimization strategies. Cash Dam can help you with tax optimization if you have a mortgage and own either a small business or a rental property.

What is cash damming?

 The Cash Dam allows the owner of a small business or rental property to more quickly pay down their non-deductible mortgage on their home. It’s a variation on the Smith Manoeuvre, but without additional investing. The Cash Dam is essentially an expedient way to change bad debt into good debt.

For someone who’s using the Cash Dam, what it involves is using a line of credit to pay for business expenses. Then, while using the increased business cash flow, you pay down a non-deductible mortgage or loan. This, in turn, produces an increasing tax-deductible business loan, while paying down a non-deductible mortgage or loan. Be advised that the Cash Dam as described above will only work for those who own a non-incorporated personal or partnership-based small business or a rental property.

Example:

 If you own a small non-incorporated business that has $2,000 in expenses each month and you also have a readvanceable mortgage, then the $2,000 per month expense would be paid by the home equity line of credit (HELOC). You then use the additional $2,000 you have in your business expense account to make a payment on your non-deductible mortgage. Interest paid on money that’s borrowed for business expenses is tax-deductible; by using the Cash Dam, you’ll be left with a tax-deductible business loan and a non-deductible mortgage that’s been quickly paid down.

One of the keys to the Cash Dam, however, is capitalizing the interest on the business line of credit. That way, you avoid using any of your own cash flow and you keep the business line of credit tax-deductible.

How does the Cash Dam differ from the Smith Manoeuvre?

The Cash Dam relies on using a tax-deductible business loan to allow you to pay down a non-deductible debt, while the Smith Manoeuvre allows you to buy investments. Investing from your credit line is why the Smith Manoeuvre has much higher risk and return than the Cash Dam.

Potential applications

 Say that you’re a rental investor, instead of using your own cash flow to pay for rental-related expenses, you can use the Cash Dam and a line of credit. In this instance, using the Cash Dam would help you pay for your personal mortgage and help you satisfy your tax obligations as well.

And if you are a small business owner, the Cash Dam can be extremely advantageous. The strategy gives you a way to quickly pay down your non-deductible mortgage and convert that debt into a tax-deductible business loan.

Finding equilibrium between shareholders and business realities

The relationship between a public company and its shareholders can be a tenuous one at times. While both interests want the company to achieve success, each have a unique view as to how success should be gained and within what timeframe.

This difference of opinion is often magnified in the mining sector, where more often than not it takes years to see a return on investment for any given mining project.  This can create tension between mining executives and shareholders, one further complicated when shareholders are pension funds and money management firms.

To put it fairly simply, shareholders are looking for consistent growth in terms of capital and production because it translates into favourable fiscal projections. However, when it takes five to ten years for a mine to start producing ore, there’s a timeframe difference that can sometimes produce tension.

I briefly touched on this issue when I addressed Laurentian University in early 2015 (see Ian Telfer: Top 10 Mining Mistakes). As I explained, in my experience I have found keeping shareholder interest in mind is important.  However, it is equally important to find a balance between their more short-term goals and a mining company’s sustainable future. Increased pressure to focus on shareholder needs can skew perspectives and lead to hasty business decisions, poor strategic planning, and acquisitions or divestitures that backfire later.

More importantly, shareholders are compensated based on short-term price performance rather than long-term business feasibility, which can misalign the interests of both management and current shareholders with the true welfare of the company.

In the mining sector, there is often a tug-of-war between management and shareholders over the company’s capital. Investors often view extra cash on a company’s balance sheet as a possible return to shareholders in the form of cash dividends, which in turn is looked favorable by markets.

However, the company’s management teams can be hesitant to do this, and rightly so. This is because management teams are committed to sustained growth and may want to use additional capital to invest in new mining projects. Re-investing capitals in new mining initiatives is sometimes not at the top of shareholders priority list.

By no means am I saying that shareholders aren’t valued, but as my history in the mining sector has shown me, they are only one component of a much larger picture that includes the management team, the employees, the shareholders and the community. Finding the right balance between appeasing shareholder demands and promoting and protecting the future of a company is paramount in order to achieve long lasting sustainability no matter what sector or industry.

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Index and Sector ETFs: Mutual Funds: Speculation X3

How many of you remember the immortal words of P. T. Barnum? On Wall Street, the incubation period for new product scams may be measured in years instead of minutes, but the end result is always a greed-driven rush to financial disaster.

The dot.com meltdown spawned index mutual funds, and their dismal failure gave life to “enhanced” index funds, a wide variety of speculative hedge funds, and a rapidly growing assortment of Index ETFs. Deja Vu all over again, with the popular ishare variety of ETF leading the lemmings to the cliffs.

How far will we allow Wall Street to move us away from the basic building blocks of investing? Whatever happened to stocks and bonds? The Investment Gods are appalled.

A market or sector index is a statistical measuring device that tracks prices in securities selected to represent a portion of the overall market. ETF creators:

  • select a sampling of the market that they expect to be representative of the whole,
  • purchase the securities, and then
  • issue the ishares, SPDRS, CUBEs, etc. that speculators then trade on the exchanges just like equities.

Unlike ordinary index funds, ETF shares are not handled directly by the fund. As a result, they can move either up or down from the value of the securities in the fund, which, in turn, may or may not mirror the index they were selected to track. Confused? There’s more — these things are designed for manipulation.

Unlike managed Closed-End Funds (CEFs), ETF shares can be created or redeemed by market specialists, and Institutional Investors can redeem 50,000 share lots (in kind) if there is a gap between the net-asset-value and the market price of the fund.

These activities create artificial demand in an attempt to minimize the gap between NAV and market price. Clearly, arbitrage activities provide profit-making opportunities to the fund sponsors that are not available to the shareholders. Perhaps that is why the fund expenses are so low — and why there are now thousands of the things to choose from.

Two other ETF idiosyncrasies need to be appreciated:

a) performance return statistics for index funds may not include expenses, but it should be obvious that none will ever outperform their market, and

b) index funds may publish P/E numbers that only include the profitable companies in the portfolio.

So, in addition to the normal risks associated with investing, we add: speculating in narrowly focused sectors, guessing on the prospects of unproven small cap companies, experimenting with securities in single countries, rolling the dice on commodities, and hoping for the eventual success of new technologies.

We then call this hodge-podge of speculation a diversified, passively managed, inexpensive approach to Modern Asset Management — based solely on the mathematical hocus pocus of Modern Portfolio Theory (MPT).

Once upon a time, but not so long ago, there were high yield junk bond funds that the financial community insisted were appropriate investments because of their diversification. Does diversified junk become un-junk? Isn’t passive management as much of an oxymoron as variable annuity? Who are they kidding?

But let’s not dwell upon the three or more levels of speculation that are the very foundation of all index and sector funds. Let’s move on to the two basic ideas that led to the development of plain vanilla Mutual Funds in the first place: diversification and professional management.

Mutual Funds were a monumental breakthrough that changed the investment world. Hands-on investing became possible for everyone. Self-directed retirement programs and cheap to administer employee benefit programs became doable.

The investment markets, once the domain of the wealthy, became the savings accounts of choice for the employed masses — because the “separate accounts” were both trusteed and professionally managed. When security self-direction came along, professional management was gone forever. Mutual fund management was delegated to the financially uneducated masses.

ETFs are not the antidote for the mob-managed & dismal long term performance of open end Mutual Funds, where professionals are always forced to sell low and to buy high. ETFs are the vehicles of choice for Wall Street to ram MPT mumbo jumbo down the throats of busy, inexperienced investors… and the regulators who love them because they are cheap.

Mutual fund performance is bad (long term, again) because managers have to do what the mob tells them to do — so Wall Street sells “passive products” with controlled content that they can manipulate more cheaply.

Here’s a thumbnail sketch of how well passive ETFs may have performed from the turn of the century through 2013: the DJIA growth rate was about 0% per year, the S & P 500 was negative; the NASDAQ Composite has just recently regained its 2000 value.

How many positive sectors, technologies, commodities, or capitalization categories could there have been?

Now subtract the fees… hmmmm. Again, how would those ETFs have fared? Hey, when you buy cheap and easy, it’s usually worth it. Now if you want performance, I suggest you try real management, as opposed to Mutual Fund management… but you need to take the time to understand the process.

If you can’t understand or accept the strategy, don’t hire the manager. Mutual Funds and ETFs cannot “beat the market” (not a well thought out investment objective anyway) because both are effectively managed by investor/speculators… not by professionals.

Sure, you might find some temporary smiles in your ETFs, but only if you take your profits will the smiles last. There may be times when it makes sense to use these products to hedge against a specific risk. But stop kidding yourself every time Wall Street comes up with a new short cut to investment success.

There is no reason why all of you can’t either run your own investment portfolio, or instruct someone as to how you want it done. Every guess, every estimate, every hedge, every sector bet, and every shortcut increases portfolio risk.

Products and gimmicks are never the answer. ETFs, a combination of the two, don’t even address the question properly — AND their rising popularity has raised the risk level throughout the Stock Market. How’s that, you ask?

The demand for the individual stocks included in ETFs is raising their prices without having anything to do with company fundamentals.

What’s in your portfolio?

How will ETFs and Mutual Funds fare in the next correction?

Are YOU ready.

Brave Old World: Market Cycle Investment Management

The Market Cycle Investment Management (MCIM) methodology is the sum of all the strategies, procedures, controls, and guidelines explained and illustrated in the “The Brainwashing of the American Investor” — the Greatest Investment Story Never Told.

Most investors, and many investment professionals, choose their securities, run their portfolios, and base their decisions on the emotional energy they pick up on the Internet, in media sound bytes, and through the product offerings of Wall Street institutions. They move cyclically from fear to greed and back again, most often gyrating in precisely the wrong direction, at or near precisely the wrong time.

MCIM combines risk minimization, asset allocation, equity trading, investment grade value stock investing, and “base income” generation in an environment which recognizes and embraces the reality of cycles. It attempts to take advantage of both “fear and greed” decision-making by others, using a disciplined, patient, and common sense process.

This methodology thrives on the cyclical nature of markets, interest rates, and economies — and the political, social, and natural events that trigger changes in cyclical direction. Little weight is given to the short-term movement of market indices and averages, or to the idea that the calendar year is the playing field for the investment “game”.

Interestingly, the cycles themselves prove the irrelevance of calendar year analysis, and a little extra volatility throws Modern Portfolio Theory into a tailspin. No market index or average can reflect the content of YOUR unique portfolio of securities.

The MCIM methodology is not a market timing device, but its disciplines will force managers to add equities during corrections and to take profits enthusiastically during rallies. As a natural (and planned) affect, equity bucket “smart cash” levels will increase during upward cycles, and decrease as buying opportunities increase during downward cycles.

MCIM managers make no attempt to pick market bottoms or tops, and strict rules apply to both buying and selling disciplines.

NOTE: All of these rules are covered in detail in “The Brainwashing of the American Investor” .

Managing an MCIM portfolio requires disciplined attention to rules that minimize the risks of investing. Stocks are selected from a universe of Investment Grade Value Stocks… under 400 that are mostly large cap, multi-national, profitable, dividend paying, NYSE companies.

LIVE INTERVIEW – Investment Management expert Steve Selengut Discusses MCIM Strategies – LIVE INTERVIEW

Income securities (at least 30% of portfolios), include actively managed, closed-end funds (CEFs), investing in corporate, federal, and municipal fixed income securities, income paying real estate, energy royalties, tax exempt securities, etc. Multi level, and speculation heavy funds are avoided, and most have long term distribution histories.

No open end Mutual Funds, index derivatives, hedge funds, or futures betting mechanisms are allowed inside any MCIM portfolio.

All securities must generate regular income to qualify, and no security is ever permitted to become too large of a holding. Diversification is a major concern on an industry, or sector, level, but global diversification is a given with IGVSI companies.

Risk Minimization, The Essence of Market Cycle Investment Management

Risk is compounded by ignorance, multiplied by gimmickry, and exacerbated by emotion. It is halved with education, ameliorated with cost-based asset allocation, and managed with disciplined: selection quality, diversification, and income rules— The QDI. (Read that again… often.)

Risk minimization requires the identification of what’s inside a portfolio. Risk control requires daily decision-making. Risk management requires security selection from a universe of securities that meet a known set of qualitative standards.

The Market Cycle Investment Management methodology helps to minimize financial risk:

  • It creates an intellectual “fire wall” that precludes you from investing in excessively speculative products and processes.
  • It focuses your decision making with clear rules for security selection, purchase price criteria, and profit-taking guidelines.
  • Cost based asset allocation keeps you goal focused while constantly increasing your base income.
  • It keeps poor diversification from creeping into your portfolio and eliminates unproductive assets in a rational manner.

Strategic Investment Mixology – Creating The Holy Grail Cocktail

So what do your Investment Manager and your neighborhood bartender have in common, other than the probability that you spend more time with the latter during market corrections?

Antoine Tedesco, in his “The History of Cocktails“, lists three things that mixologists consider important to understand when making a cocktail: 1) the base spirit, which gives the drink its main flavor; 2) the mixer or modifier, which blends well with the main spirit but does not overpower it; and 3) the flavoring, which brings it all together.

Similarly, your Investment Manager needs to: 1) put together a portfolio that is based on your financial situation, goals, and plans, providing both a sense of direction and a framework for decision making; 2) use a well defined and consistent investment methodology that fits well with the plan without leading it in tangential directions; and 3) exercise experienced judgment in the day-to-day decision making that brings the whole thing together and makes it grow.

Tedesco explains that: new cocktails are the result of experimentation and curiosity; they reflect the moods of society; and they change rapidly as both bartenders and their customers seek out new and different concoctions to popularize. The popularity of most newbies is fleeting; the reign of the old stalwarts is history — with the exception, perhaps, of “Goat’s Delight” and “Hoptoad”. But, rest assured, the “Old Tom Martini” is here to stay!

It’s likely that many of the products, derivatives, funds, and fairy tales that emanate from Modern Portfolio Theory (MPT) were thrown together over “ti many martunies” at Bobby Van’s or Cipriani’s, and just like alcohol, the addictive products created in lower Manhattan have led many a Hummer load of speculators down the Holland tubes.

The financial products of the day are themselves, created by the mood of society. The “Wizards” experiment tirelessly; the customers’ search for the Holy Grail cocktail is never ending. Curiosity kills too many retirement “cats”.

Investment portfolio mixology doesn’t take place in the smiley faced environment that brought us the Cosmo and the Kamikaze, but putting an investment cocktail together without the risk of addictive speculations, or bad after- tastes, is a valuable talent worth finding or developing for yourself. The starting point should be a trip to portfolio-tending school, where the following courses of study are included in the Investment Mixology Program:

Understanding Investment Securities: Investment securities can be divided into two major classes that make the planning exercise called asset allocation relatively straightforward. The purpose of the equity class is to generate profits in the form of capital gains. Income securities are expected to produce a predictable and stable cash flow in the form of dividends, interest, royalties, rents, etc.

All investment securities involve both financial and market risk, but risk can be minimized with appropriate diversification disciplines and sensible selection criteria. Still, regardless of your skills in selection and diversification, all securities will fluctuate in market price and should be expected to do so with semi-predictable, cyclical regularity.

Planning Securities Decisions: There are three basic decision processes that require guideline development and procedural disciplines: what to buy and when; when to sell and what; and what to hold on to and why.

Market Cycle Investment Management: Most portfolio market values are influenced by the semi-predictable movements of several inter-related cycles: interest rates, the IGVSI, the US economy, and the world economy. The cycles themselves will be influenced by Mother Nature, politics, and other short-term concerns and disruptions.

Performance Evaluation: Historically, Peak-to-Peak analysis was most popular for judging the performance of individual and mutual fund growth in market value because it could be separately applied to the long-term cyclical movement of both classes of investment security. More recently, short-term fluctuations in the DJIA and S & P 500 are being used as performance benchmarks to fan the emotional fear and greed of most market participants.

Information Filtering: It’s important to limit information inputs, and to develop filters and synthesizers that simplify decision-making. What to listen to, and what to allow into the decision making process is part of the experienced manager’s skill set. There is too much information out there, mostly self-motivated, to deal with in the time allowed.

Wall Street investment mixologists promote a cocktail that has broad popular appeal but which typically creates an unpleasant aftertaste in the form of bursting bubbles, market crashes, and shareholder lawsuits. Many of the most creative financial nightclubs have been fined by regulators and beaten up by angry mobs with terminal pocketbook cramps.

The problem is that mass produced concoctions include mixers that overwhelm and obscure the base spirits of the investment portfolio: quality, diversification, and income.

There are four conceptual ingredients that you need to siphon out of your investment cocktail, and one that must be replaced with something less “modern-portfolio-theoryesque”:

1) Considering market value alone when analyzing performance ignores the cyclical nature of the securities markets and the world economy.

2) Using indices and averages as benchmarks for evaluating your performance ignores both the asset allocation of your portfolio and the purpose of the securities you’ve selected.

3) Using the calendar year as a measuring device reduces the investment process to short-term speculation, ignores financial cycles, increases emotional volatility in markets, and guarantees that you will be unhappy with whatever strategy or methodology you employ —most of the time.

4) Buying any type or class of security, commodity, index, or contract at historically high prices and selling high quality companies or debt obligations for losses during cyclical corrections eventually causes hair loss and shortness of breath.

And the one ingredient to replace: Modern Portfolio Theory (the heartbeat of ETF cocktails) with the much more realistic Working Capital Model (operating system of Market Cycle Investment Management).

Cheers!

Stock Market Corrections Are Beautiful… When

A correction is a beautiful thing, simply the flip side of a rally, big or small. Theoretically, even technically I’m told, corrections adjust equity prices to their actual value or “support levels”. In reality, it’s much easier than that.

Prices go down because of speculator reactions to expectations of news, speculator reactions to actual news, and investor profit taking. The two former “becauses” are more potent than ever before because there is more self-directed money out there than ever before. And therein lies the core of correctional beauty!

Mutual Fund unit holders rarely take profits but often take losses. Additionally, the new breed of Index Fund Speculators over-react to news of any kind because that’s what speculators do. Thus, if any brief little market hiccup becomes considerably more serious, new investment opportunities will become abundant!

Here’s a list of ten things to think about doing, or to avoid doing, during corrections of any magnitude:

1. Your present Asset Allocation should be tuned in to your long-term goals and objectives. Resist the urge to decrease your Equity allocation because you expect a further fall in stock prices. That would be an attempt to time the market, which is (rather obviously) impossible. Asset Allocation decisions should have nothing to do with stock market expectations.

2. Take a look at the past. There has never been a correction that has not proven to be a buying opportunity, so start collecting a diverse group of high quality, dividend paying, NYSE companies as they move lower in price— Investment Grade Value Stocks. I start shopping at 20% below the 52-week high water mark— the bargain bins are filling.

3. Don’t hoard that “smart cash” you accumulated during the last rally, and don’t look back and get yourself agitated because you might buy some issues too soon. There are no crystal balls, and no place for hindsight in an investment strategy. Buying too soon, in the right portfolio percentage, is nearly as important to long-term investment success as selling too soon is during rallies.

4. Take a look at the future. Nope, you can’t tell when the rally will resume or how long it will last. If you are buying quality equities now (as you certainly could be) you will be able to love the rally even more than you did the last time— as you take yet another round of profits. Smiles broaden with each new realized gain, especially when most Wall Streeters are still just scratchin’ their heads.

5. As (or if) the correction continues, buy more slowly as opposed to more quickly, and establish new positions incompletely. Hope for a short and steep decline, but prepare for a long one. There’s more to Shop at The Gap than meets the eye, and if you are doing it properly, you’ll run out of cash well before the new rally begins.

6. Your understanding and use of the Smart Cash concept has proven the wisdom of The Investor’s Creed (look it up). You should be out of cash while the market is still correcting— it gets less scary each time. As long your cash flow continues unabated, the change in market value is merely a perceptual issue.

7. Note that your Working Capital is still growing, in spite of falling prices, and examine your holdings for opportunities to average down on cost per share or to increase yield (on fixed income securities). Examine both fundamentals and price, lean hard on your experience, and don’t force the issue.

8. Identify new buying opportunities using a consistent set of rules, rally or correction. That way you will always know which of the two you are dealing with in spite of what the Wall Street propaganda mill spits out. Focus on Investment Grade Value Stocks; it’s just easier, as well as being less risky, and better for your peace of mind. Just think where you would be today had you heeded this advice years ago—

9. Examine your portfolio’s performance: with your asset allocation and investment objectives clearly in focus; in terms of market and interest rate cycles as opposed to calendar Quarters (never do that) and Years; and only with the use of the Working Capital Model (look this up also), because it is based upon your personal asset allocation. Remember, there is really no single index number to use for comparison purposes with a properly designed portfolio.

Unfortunately, only Self Directed 401k and IRA programs are able to use Market Cycle Investment Management.

10. So long as everything is down, there is nothing to worry about. Downgraded (or simply lazy) portfolio holdings should not be discarded during general or group specific weakness. Unless of course, you don’t have the courage to get rid of them during rallies— also general or sector specifical (sic).

Corrections (of all types) will vary in depth and duration, and both characteristics are clearly visible only in institutional grade rear view mirrors. The short and deep ones are most lovable (kind of like men, I’m told); the long and slow ones are more difficult to deal with. Short ones (those that last a few days, weeks, or months) are nearly impossible to deal with using Mutual Funds.

So if you overthink the environment or overcook the research, you’ll miss the party. Unlike many things in life, Stock Market realities need to be dealt with quickly, decisively, and with zero hindsight.

Because amid all of the uncertainty, there is one indisputable fact that reads equally well in either market direction: there has never been a correction/rally that has not succumbed to the next rally/correction—

Think cycle instead of year, and smile more often.

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One Person’s Bond Crash is Another’s Income Opportunity

Today’s “Investment News” headline (from Bloomberg) is designed to make you shiver in your income portfolio boots:

“Big fixed income shop prepares for the worst”…

The Bond Portfolio “Window Dressing” sell-off has begun.

Bond funds in general are now holding 8% of assets in cash, the article reports…highest since the financial crisis, and 1999, even. Professional Bond Traders certainly have reason to worry; closed end fund income investors not so much.

The article is reporting fear of lower market values with respect to existing bonds, particularly the higher yield variety…. big players in the bond market are hoarding cash (even selling existing holdings at losses in the process).

Bond Traders and Fund Managers look foolish as inventory market values fall. The cash hoard is their way of preparing to buy similar paper at higher yields sometime in the future and/or to buy back “old” bonds after the fall in price.

In the meantime, they are holding zero interest rate cash in anticipation of the higher yields… and could care less about the negative impact this behavior has on portfolio yields.

This is the result of what I call “Total Return Crossover”… the absurd application of market value growth analysis, instead of income development criteria, to primarily income security portfolios. (An analytical atrocity that is reinforced and encouraged by retirement plan regulators.)

So bond and Income Mutual Fund managers choose to actually lose your money now to look less foolish than the competition later. This “panic selling” by professionals leads to irrational, “knee jerk” reactions in amateurs.

What I did not read in the Bloomberg “disaster scenario” (and this should calm all the frayed nerves) was any indication or expectation of default on the interest paid by the bond issuers. This is the key issue with income investing…

Bonds are corporate and government debt securities, people… so long as they pay the interest why worry about the market value?

Wall Street is always more concerned about appearances than it is about income generation. And the Masters of the Universe really do have a problem… OMG, what this could do to those year-end bonuses…

But we (the average investors out here) can simply reinvest our current CEF income in any number of portfolios of bonds, preferred stocks, loans, notes, etc., selling at discounts, not only from their maturity value, but also from their combined Net Asset Values. Read that again please.

Remember, Closed End Income Fund portfolios aren’t influenced directly by either the fear (or greed) of individual investors… they are under a “protective dome”, if you will, that is subject to all forms of volatility for a vast array of reasons.

But an Income CEF, for example, becomes the totally liquid trading vehicle for a portfolio that could contain hundreds of totally illiquid individual securities… do you believe in magic? Be it Magic, or genius, who cares. We, mere mortals that we are, can jump on the lower prices that chill the blood of Wall Street’s Master Class.

Closed End Fund investors are uniquely positioned to take advantage of both the lower prices and the higher yields that exist right now. Market Cycle Investment Management users have done it before, right?

Remember the fall in CEF prices from early 2007 (higher rates caused these) through early March 2009 (even in the face of the lowest interest rates ever)… and the ensuing rise through October 2011?

Well, do you really think that the anticipated one percentage point rise in interest rates over the next year or so will cause Financial Crisis #2?

Isn’t it great when Wall Street’s pain becomes fuel for the small investor’s gain…. but only if you take advantage of the lower price, higher yield scenario that is staring you in the face as you read this message..

Yes, YOU can be the Master of this Universe!

Income Investing: “Feed Your Head… Feed Your Head”

Jefferson Airplane has never, ever, been mistaken for a band of financial advisors, but the White Rabbit lyrics can be incredibly instructional to the generation of investors who experienced the classic first hand — as a description of their own college days’ lifestyle. If only they had heeded the dormouse’s call to “feed your head.” For the sake of your retirement sanity and security, you just have to make income investing an intellectual exercise — not an emotional one.

The Brainwashing of the American Investor has its own tale of an Alice whose “logic and proportion” had “fallen sloppy dead”. Many years ago, when interest rates soared into double digits, elderly Alice was well advised to invest her stash in a portfolio of Ginnie Maes. Broadly smiling, she bragged to her friends about the federally guaranteed 13% interest she was receiving in regular monthly intervals — much more than she needed to cover her living expenses.

But interest rates continued to move higher, and the decreasing market value of her Ginnie Maes was more than she could tolerate. “If rates continue to go up, I’ll have nothing left” she cried to her White Knight financial advisor who suggested patience and understanding. The very same pill that made her income grow larger was also making her market value become smaller.

Yet the income kept rolling in, higher yielding unit trusts were purchased with the excess, and major redemptions were nowhere to be seen. The income kept growing, the market value kept shrinking, and Alice was seeing red from seeing red on her account statements.

So Alice went to her local bank and traded in her absolutely government guaranteed 13 per centers for some laddered, non-negotiable, 8.5% CDs. “No more erosion of my nest egg”, she toasted proudly with the hookah smoking bank caterpillar who orchestrated her move to lower income levels. Within a few months, she was liquidating CDs to pay the bills that never seemed to be a problem with those terrible Ginnie Maes.

Don’t let such uniformed thinking sabotage your retirement program; don’t let the selfish advice of a product sharpshooter send you chasing rabbits when IRE (interest rate expectations) or other temporary market conditions shrink the market value of your income portfolio. Feed your head; feed—your—head.

Income pays the bills, and if the income level is both steady and adequate, there is no need to change investments. Market value should be used to determine when to buy more (at lower prices) and when to take profits (at higher ones). It is almost never necessary to take a loss on a high quality (government guaranteed in Alice’s case) income security.

More recent experimenters in much more sophisticated potions have addressed the issue with similar results, reaching mind-numbing conclusions such as these:

  • I know the income hasn’t changed throughout the debacle in the financial sector but I don’t want to buy anymore of these securities until the prices go back above what I paid for them originally. Translation: I’d rather stick with my 4.5% tax-free yield than increase it by adding to my positions at lower prices.
  • Sure, I understand the relationship between IRE and the prices of income CEFs but individual bonds and Treasuries haven’t suffered nearly as much. That’s where we should have been. Translation: I would be much happier with a 3% than with an 8% rate of realized income.
  • I’m tired of seeing all the negative positions in my portfolio. Let’s keep all the income we receive in money market until we’re back in positive territory. Translation: I’d rather accept 0.5% or so, than reduce my cost basis and increase my yield by adding to my positions at lower prices.

Modern brokerage firm monthly statement “pills” were developed during the dot-com era, when Wall Street was trying to emphasize the brilliance of its speculative prescriptions by making us all feel ten feet tall, month after month after month.

But the geniuses on the institutional chessboard produced too many mushroom product varietals and the Red Queen of corrections lopped off many of their sacred heads. The papers that were designed to make our chests burst with pride have turned on us as a haunting reminder of the reality of markets and the cycles that push them in either direction.

It should be easy to navigate a quality income portfolio through whatever circumstances, cycles, and scandals come at you, but a clear head and a clearer understanding of what to expect is required. Most brokerage firm statements make it difficult to monitor asset allocation using any methodology, including the Working Capital Model, and I don’t think that it’s by chance.

Confusion breeds unhappiness, and unhappiness brings about change, and the masters of the universe encourage you to fritter around from mushroom to mushroom in perpetual motion. To whose benefit?

It would be wonderful if an investor’s monthly statement would organize his securities based on their class and purpose, but Wall Street doesn’t want such distinctions to be made easily. It would be great if the institutions would help investors formulate reasonable expectations about various types of securities under varying conditions, but that’s not likely to happen either.

It would be spectacular if the media would produce information and explanation instead of news bites and sensationalism, but you guessed it — not much chance of that.

Income investing can be easy. Ask your hookah-smoking caterpillar to give you the how?