Ed Rempel CFS

Ed Rempel Top Key Note Speaker at The Canadian Financial Summit

Ed Rempel is a well known Canadian “Financial” Keynote Speaker and shares his enthusiasm and many years of experience to primed financial audiences that want, need and deserve more and better insight and information. Join Ed Rempel a senior financial industry expert with a host of other top speakers at the Canadian Financial Summit. www.canadianfinancialsummit.com September 13-16 Online Event.

 

 

Are Mutual Funds Worth It?

“If you don’t like the idea that most of the money spent on lottery tickets supports government programs, you should know that most of the earnings from mutual funds support investment advisors’ and mutual fund managers’ retirement.” – Robert Kiyosaki

 

Written by Steve Nyvik, BBA, MBA, CIM, CFP, R.F.P.
Financial Planner and Portfolio Manager, Lycos Asset Management Inc.

What is a Mutual Fund?

A mutual fund is a type of investment fund where investors buy units directly from the fund and the proceeds are invested by a professional investment manager in a variety of securities according to the fund’s stated investment objectives.  Such investments may include stocks, bonds, and money market instruments.

The mutual fund is known as an open-end investment fund as it can raise an unlimited amount of investment capital by continuously issuing new units.  The units don’t trade on a stock exchange, rather investors buy or redeem (sell) their units directly from the fund at the fund’s Net Asset Value Per Share (NAVPS) plus any applicable sales charges.

All income, expenses, gains and losses of the fund are shared amongst the unitholders based on their percentage ownership of the fund.

The main advantage of a mutual fund is that it may represent a cost effective way to gain access to a particular professional investment manager.  And for small amounts of money, which can be as low as $250, it is invested in a diversified portfolio rather than concentrated in one or a small number of investments.

The main disadvantages of a mutual fund include:

  • potentially high sales charges – Front-end load or Deferred Sales Charges (DSC);
  • fund expenses (which include legal fees for putting together the prospectus, accounting fees, marketing and advertising expenses, investment management fees to pay the fund manager and investment trailer fees that are paid to the salesperson who sells you the fund) which cut into returns;
  • professional management is not infallible;
  • the fund manager may be forced to sell assets at depressed prices when unitholders choose to redeem units;
  • the manager does not customize the investments according to your particular situation or preferences as the manager may be dealing with thousands of fund holders;
  • you have no input as to how it will be managed or what it will own;
  • you normally won’t be able to view the fund’s holdings other than when it publishes them periodically – typically on a semi-annual basis; and
  • you normally don’t have access to the fund manager to freely call him or her to enquire about the fund. The fund manager normally won’t know who you are.

When it is Worth Having a Fund Manager

The key issue is whether the fund manager is able to add value.  Is the manager skilled and able to generate returns, net of costs, in excess of a comparable market index or generate similar returns to the market index but do so with less risk.

Determining this is not an easy task.  When outperformance in term of superior net returns or in terms of better risk adjusted returns occurs, we need to have some idea of whether that was due to skill or luck.  We want to know this to gain confidence of whether such added value is likely to be repeated in the future years.

Identifying Skill

A skillful investment manager might be identified:

  • where the manager utilizes an investment strategy that is sensible, the variables screened for are materially significant and directly relate to financial performance, and enough securities are selected to generate the strategy returns to reduce the effect of randomness;
  • by learning the manager’s investment philosophy on constructing and managing a portfolio in terms of both risk and return;
  • by examining the manager’s background, education, experience and character including:
    • relevant investment education;
    • investment experience and experience managing portfolios;
    • age;
    • intelligence;
    • rational temperament;
    • self-confidence, independent thinking and creativity;
    • patience;
    • competitiveness; and
    • a passion for investing
  • by examining through time the manager’s performance net of fees compared to the comparable market index. A consistent history of outperformance can be indicative of skill.

But at What Price?

Robert Kiyosaki’s quote may be a little exaggerated but does highlight the issue of costs.  Consider a mutual fund with an all-inclusive management expense ratio of 2.3%.  This fund comprises of a fund manager fee of 1.0%, the trailer fee of 1.0% to the investment adviser and 0.30% for expenses.  On top of this would be any sales charges.

If you have more than $100,000, you can do better.  You can instead hire a portfolio manager that also customizes your portfolio according to your cash needs, risk tolerance and investment preferences.  Some of these portfolio managers can also offer you financial planning advice and service.  And this portfolio manager knows you and you deal direct with him or her.  Your cost could be cut in half putting more money in your pocket.  Now how’s that for building a better mouse trap?

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!

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?

Income CEF Price Volatility… No Problem at All

Market Cycle Investment Management portfolios are different from any others you may be analyzing, and all investors analyze their portfolios most intently when their “bottom line” market values begin to crumble. This focus on market value is part of Wall Street’s Brainwashing of the American Investor.

MCIM investing is more realistic. It recognizes that investment markets (both equity and income) are cyclical. Rarely do portfolio market values trend upward as long as they have since March of 2009, and most equity investors have forgotten the five month, 22%, mini-correction that ran from May through September 2011. When will we experience the real deal?

MCIM focuses on “working capital”, a measure of the total cost basis of the securities and cash contained in an investment portfolio. Managed properly, this measure should grow in all market, economic, and interest rate environments, irrespective of changes in “market value”… really.

MCIM portfolios include 30% Income Purpose securities (based on Working Capital), and never own non Investment Grade Value Stock equities. This translates into portfolios of high quality securities, each contributing to higher realized base income than that contained in market averages and blended Mutual Funds.

Embracing the cycles, MCIM portfolios strive to grow both total Working Capital and portfolio “Base Income”steadily, regardless of what is going on in the investment markets, in either direction.

MCIM portfolio “Working Capital” will be higher now than on January 1st; and “base income” will have risen in all portfolios where cash flow has remained positive… in spite of lower CEF market values. Long term, this is the single most important of all portfolio management issues.

Income Closed End Fund (CEF) prices have been moving lower since November 2012; the decline accelerated in May — but with barely any change in total income generated. In November 2012, you’ll recall, many CEFs were selling at premiums to NAV. The premiums are now gone, taking a whole lot of market value with them… but, again, with little or no change in income.

Stock market numbers have also weakened recently, and this 2.5 year divergence between equity and income security prices is quite normal; accelerated weakness in income security prices often signals an upcoming stock market correction, as it did in 2007..

The vast majority of income CEFs are now selling at significant discounts to the Net Asset Value of the security portfolios inside. The vast majority of income CEFs are selling at significant discounts to the market value of the securities they contain. (repetition intended)

Wall Street wants you to believe that higher prices and lower yields are better… how does that make any sense with no change in the portfolio content?

A selection universe of about one hundred taxable income CEFs and seventy tax free income CEFs is used in constructing MCIM portfolios. In the six plus years since the depths of the financial crisis, and in spite of the lowest interest rate environment in history, the vast majority of these CEFs have maintained their regular payouts to shareholders.

Lower prices now are as much a result of FED tinkering as threatened rate hikes.

Historically, in more “normal” interest rate environments, income increases have been more prevalent than income reductions. Overall, income CEF managers coped well with the lowest interest rates ever…. how have they been dealing with the specter of higher rates? Keep in mind that no actual interest rate change has yet occurred.

After six years of artificially low interest rates, many have been forced to reduce their payouts… very few have made significant dividend cuts.

Now the interesting part: at current prices, the average dividend yield on 57 taxable CEFs paying over 7.0% is approximately 8.5%; the average on 53 tax free CEFs paying over 6% is about 6.7%

The vast majority of all CEFs made their regular scheduled distributions throughout the financial crisis; more actually raised their payouts than reduced them; after six years of close-to-zero rates, higher “coupons” will eventually increase CEF dividend payouts to normal, pre-financial crisis, levels.

The current yield on the MCIM CEF Universe is well above 6% for tax free income and above 8% for taxable. Why is this bad news? Only, yes only, because professional bond traders have to realize losses when they trade… income investors do not have to sell at all…. they can take advantage of “discounts” to increase their spending money.

What’s lnside the CEFs:

• Each CEF portfolio contains hundreds of individual issues with varying qualities, maturities, call provisions, etc. The average duration is between 7 and 8 years

• Managers use short term borrowing to purchase additional securities; nothing forces them to borrow at higher rates if they can’t still invest profitably

• Managers capitalize on profit-taking opportunities; and are not forced to sell at losses.

• CEF share prices are completely “uncoupled” from NAV; shareholders are investing in the investment company as opposed to owning a piece of the investment portfolio itself.

As I see it, and this is no prediction or recommendation of any specific course of action, CEFs provide investors with the opportunity to take advantage of irrational price dislocations in the income securities market — an opportunity that is difficult for the average investor to capitalize upon using individual securities.

By adding to existing CEF positions, investors increase overall portfolio yield, increase yield on specific holdings, and reduce per share cost basis.

Thus, even if some reduced payouts are experienced, the overall level of income is likely to be at least stable, and possibly higher. Right now, the expectation of higher interest rates is probably the main force driving Closed End Fund prices lower.

BUT, particularly if the stock market corrects, higher interest rates and higher demand for safety may cause investors to seek out higher yielding and safer investments.

Never forget, all companies must pay their bond, note, and preferred stock investors BEFORE a penny goes to their Equity investors… income CEFs contain no equities, even though your (purposely) confusing Wall Street account statement tells you that they are equities…. hmmm

Please Mr. Obama, Lend Us Your Crystal Ball

The President wants the DOL to fine professionals who make money allowing 401k participants to make “bad” investments.
—————————————————-
So what’s the difference between a “bad” and “good” investment? Right, well in the Will Rogersian world of politicians and regulators, “the good ones only go up in price; the bad ones go down”.

“Don’t gamble; take all your savings and buy some good stocks and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.” WR

Plan sponsors and other financial professionals are supposed to know which ones will go in what direction… and NEVER (as Will would admonish) buy a security that is going to go down.

“Where have all the crystal balls gone? Gone to hindsightful regulators, all of them.” PP&M, sort of.

POTUS wants investment advisors to only select the “good ones”, and they are expected to know in advance where the market may be going, in both the short run and the long. And getting paid for their efforts, well that can’t be “good”, especially when the market value goes down.

Remember, “advisors” are mostly salespeople; regulators are mostly cops.

Do any of these guys have a clue about the workings of the stock market? Which is worse: having the foxes (advisors) in charge of the hen house (401k investment (not pension) plans), or having the lunatics (politicians & regulators) running the asylum (stock market expectations)?

Both are bad, unrealistic, and counterproductive. Markets rise and fall in price… the advisory deal is to limit the amount of risk in a portfolio. Risk of loss is always involved, but it can be minimized… regulators just don’t really get it.

Participants need to be educated not coddled; costs are not the most important aspect of retirement investing, net spendable income at retirement is; stock market values will always go up and down… and that’s a good thing.

If 401k participants are expected to be retirement ready, they need to know the importance of growing income and to have investment options that can get the job done.

I’m not sure that can be accomplished in the current 401k space, but the education has been available for a long time… and it can be applied fairly easily in a “self directed” 401k environment.

And that, Mr. President, is all you should be lecturing the investment advisory community about. If a plan participant is too lazy, busy, greedy, or preoccupied to determine “what’s inside” an investment option, it is not the fault of his or her employer.

The education is out there: just read The Brainwashing of the American Investor

… and here are two Self Directed IRA or 401k income investment presentations for you to think about. 

Next Webinar April 8th

To Rollover 401k Plan Assets or Not To… That Is The Question

The major purveyors of 401k products, and those who benefit from using them remind me of politicians… they press the party line, and use their power to demonize the competition.

Their position and deep pockets allow them to get their message out while we who have neither can only shake our heads and whimper about the sacred purpose of retirement income programs.

But, in the simplest of terms, since when has 2% been better than 6% (both after expenses)? The DOL, fiduciaries, and plan sponsors are staring back at me, eyes wide shut.

LinkedIn discussion groups have been talking about the pros and cons of 401k rollovers to private IRA portfolios. Most of the articles, and not by a slim margin, are institutionally biased advertisements for low cost Mutual Funds and ETFs, despite the fact that have absolutely no “preparation for retirement income bones” in their mass marketed bodies.

When the market corrects, the results will be what they have always been for market-value-growth-only programs. This time though, the DOL will fine the Plan Sponsors (i.e., the corporations so bitterly hated by our government), for allowing plan participants to make investment judgment errors with their own money plus the matching contributions…. let hindsight reign in the 401k space!

The 401k “space” as they call it, has become a lucrative product shopping mall, totally out of touch with what should be the long run purpose of these “quasi” retirement programs: it’s the monthly retirement income that pays the bills, Charlie Brown, not the market value.

If a person were a conspiracy theorist, he or she could make a case for institutional/congressional manipulation of interest rates… keeping them near zero so that gurus will continue to predict that stock market “returns” will outpace those of income purpose securities. Hmmm.

None, absolutely none, of the products provided by the top institutional peddlers produce nearly as much after “expense-ratio” income as Closed End Income Funds. These outstanding (and income paying far longer than any income ETF) managed portfolios are never, ever, found in 401k Plans… except the Self Directed, “safe harbor” variety.

Interestingly, all the major 401k product providers, also manage Closed End Fund product lines that generate generous income, even after higher fees. These fees, so important to regulators and politicians, are never paid by the recipients of the much higher income.

CEFS paying 6% to 9% after expenses are commonplace, but not available in 401k plans. Similarly, there are no restrictions on speculation in the equity markets, where similar high quality managed equity portfolios have been available for decades.

The retirement plan (401k) community has gotten so paranoid over goose-stepping DOL auditors and other regulators armed with crystal clear hindsight, that they have completely lost site of “spending money” as the be all and end all purpose of retirement portfolios. They must “outperform” half their brethren, and be dirt cheap to boot.

Yeah, I know that 401k Plans are not retirement portfolios, but neither the regulators, plan sponsors, congressional leaders, POTUSs, fiduciaries, or plan participants seem able or willing to accept that reality… why should they?

Looking inside the multi-billion dollar Vanguard 2020 TDF, we find 60% invested in equities (no less than 7000 individual positions) and income of about 1.5%. Wake up regulators… the “unfairness” is in the “emperor’s new clothes” products provided to the plan sponsors for inclusion in employee product menus.

You the fiduciaries, you the regulators, you the witch hunters, and you the do-gooders need to look at the product providers instead of their victims.

If you insist upon looking at investment plans as retirement programs (ERISA = Employee Retirement Income Act), perhaps you need to mandate that an outside-the-mainstream, “Self Directed”, income program be a major part programs you supervise. Until the focus changes from market value and expense control to after expenses income, these plans cannot provide what is expected of them… retirement readiness.

So in answering the “To rollover the 401k or not to rollover the 401k” question, I would say: “Run like _ _ _ _, just as fast as you can, to get out of that 401k and never ever buy a low income or no income security in the Rollover IRA you move to.

As long as plain vanilla portfolios of high quality equity (IGVSI companies) and Income CEFs yielding an experienced average, net/net 6% or more, are banned from participating in the 401k marketplace by (possibly) illegal monopolistic practices, rollovers to IRAs should be a requirement, not an option.

See how they run: https://www.dropbox.com/s/b4i8b5nnq3hafaq/2015-02-24%2011.30%20Income%20Investing_%20The%206_%20Solution.wmv?dl=0

As long as regulators are blaming generous employers for the investment mistakes of their employees, self-directed, income purpose, 401k plans are a much less scary, “almost a retirement plan”, option.

Year End Review 2014 and 2015 Preview

Let’s Talk About the Market Numbers…

Note that this report pertains most directly to portfolios operated under the guidelines, rules, and disciplines of Market Cycle Investment Management (MCIM). MCIM produces disciplined “High Quality Growth & Income Portfolios”, designed to maintain and/or to grow income regardless of the direction taken by markets or interest rates.

———————————————————-

Both markets have been good to MCIMers this year: Investment Grade Value Stock Index (IGVSI) equities produced plenty of profits and dividend income, while the income Closed End Funds (CEFs) produced much higher yields than many “experts” would admit even exist… and occasional profits.

On the negative side, new equity investment opportunities were scarce, and many income CEFs reduced their payouts slightly, reflecting more than six years of historically low interest rates. I suspect that both conditions will be reversed soon.

A recent (unaudited) review of known MCIM “Working Capital” produced some interesting numbers, even without including year end dividends:

• Roughly 35% of total realized income was disbursed
• Nearly 25% of growth purpose capital remained in “smart cash” reserves for scheduled disbursements… and anticipated lower prices on equities. (Smart cash comes from income and profits)
• Roughly 65% of total earnings was reinvested in new and old securities
• New “Working Capital” was produced at a rate somewhere between 9% and 10%
• Less than 20% of investors made additions to investment programs, eschewing income yields in excess of 6%
• None ot selected MCIM portfolios lost Working Capital… even after culling “poorest performers” throughout the year.

Working Capital” (total cost basis of securities + cash) is a realistic performance evaluation number…. it doesn’t shrink either during corrections or as a result of spikes in interest rates. It continues to grow so long as dividends, interest, profits and deposits exceed realized losses and disbursements.

Using the “Working Capital Model” facilitates preparation for future income needs with every decision made throughout the history of an investment program… MCIM working capital grows every month, regardless of changes in market value, so long as the investor disburses less than the portfolio is producing.

Year end is always a good time for investors to review asset allocation and projected income needs… if you are over 50 and haven’t considered the subject, it’s time to do so. If you expect to start withdrawing from your portfolios in the next few years, you need to determine if asset allocation changes are necessary.

If your income allocation is not generating at least 6% in spending money, or 401k balances are subject to shrinkage when the stock market corrects, it’s time to deal with these problems.

If you are not taking advantage of 6%+ tax free yields (and a higher range in taxable CEFs), you owe it to yourself to investigate the opportunities.

<<>>                 <<>>                 <<>>

So is there a “Grinch” in your 2015 portfolio performance future? What’s likely to happen?

The Stock Market is about to finish 2014 at the highest year end number ever recorded, and with each new “ATH”, the likelihood of a market correction increases… this 6.75 year rally is the longest, broadest, and most stubborn in stock market history.

So long as income investors are abused with artificially low rates, a gradual reduction in yields is likely to hold income CEFs around current prices… higher future rates are already anticipated in current market values.

Once higher rates become reality, there are several reasons why CEF prices should firm and, over the longer term, rise, with increased income production…

But even if the correction starts tomorrow, what has nearly 40 years of financial history taught us about the MCIM “much-higher-quality-and-income-than-any-other-form-of-investment-portfolio” methodology?

The IGVSI universe, high quality ADRs, REITS, MLPs, Royalty Trusts, plus Equity and Income CEFs should logically have been expected to fare better than the stock market averages during the three financial crises of our lifetimes. Many MCIM users can attest to this, but the logic is clear.

Every security produces income, and reasonable profits are always realized. New equity investments are only made when prices have fallen 20% or more; income securities are added to at lower prices to reduce cost basis and increase yield. Not to mention the fact that MCIMers invest only in the highest S & P quality ranked companies, filtered further by dividend history, NYSE, and profitability.

MCIM users were low on equities in August 1987 but fully invested by November; they owned no mutual funds, no NASDAQ securities, and no IPOs in 1999; they lost virtually no working capital, reinvested all earnings, and rebounded quickly from the financial crisis.

Most investors, particularly Mutual Fund owners and 401k participants were blindsided, not once, but on all three occasions. The S & P 500 has gained only 3% per year in the 15 it has taken to get to its current level!

So if the rally continues, Working Capital growth will continue right along with it. But when the correction comes along, cash reserves and continued income will likely be available to takes advantage of new opportunities that arise in the MCIM select group of potential investment securities.

The longer the correction (the financial crisis took roughly 20 MCIM months to reach bottom on March 9 2009), the more Working Capital will be available when the next round of stock market all time highs is upon us.

And again, most importantly I believe, all programmed income payments will be made on time and without dipping into capital…