What your consultant did not tell you about Income Investments, AQ&A

One of the biggest mistakes investors make is ignoring the “return on investment” portion of their investment portfolio … many don’t even realize it has to happen. The second biggest mistake is to check the performance of profitable securities in the same way as “growth-oriented” securities (stocks).

The following Questions and Answers assume that portfolios are built around those that minimize these four major financial risks: All securities meet high quality standards, generate a certain return, are diversified in a “classic” way, and are sold when a “reasonable” target profit is achieved.

1. Why should a person invest for income; Aren’t stocks better growth mechanisms?

Yes, the goal of capital investment is “growth” production, but most people think of growth as an increase in the market value of the securities they own. I think of growth in terms of the amount of new “capital” created by the realization of profits and the complexity of earnings when that new capital is reinvested, using the distribution of “cost-based” assets.

Most counselors don’t look at profits with the same warm and fuzzy feeling I do … maybe it’s a tax code that treats losses more positively than gains, or a legal system that allows people to sue counselors if a review looks wrong. can be purchased. To be honest, there is no such thing as a bad profit.

Most people do not believe that in the last 20 years, all three major stock markets have “surpassed” the average of the 100% income portfolio in “gross income” …: Annual interest income:

NASDAQ = 1.93%; S&P 500 = 4.30%; DJIA = 5.7%; 4% Closed Last Fund (CEF) portfolio = 6.1%

  • * NOTE: CEFs that have been taxed for the last 20 years have actually earned about 8%, tax exemptions, a little less than 6% … and then all the capital gains from 2009 to 2012 are available. was.

Try to look at it this way. If your portfolio brings in less revenue than you draw, something must be sold to provide the money spent. Most financial advisors agree that at least 4% (must be paid in monthly increments) is required to retire without taking into account travel, grandchildren’s education, and emergencies. This year alone, most of that money had to come from your boss.

  • Similar to the basic fixed annuity program, most retirement plans provide for an annual reduction in principal debt. On the other hand, the “retirement-ready” income program leaves the main debt to the heirs while increasing the annual expenses for retirees.

How much of the investment portfolio should be directed to income?

For everyone under the age of 50, at least 30%, then the allocation increases as the pension grows … portfolio size and spending requirements should dictate how much of the portfolio could be at risk in the stock market. Typically, no more than 30% in shares for retirees. Very large portfolios can be more aggressive, but isn’t real wealth knowing that you no longer have to take significant financial risks?

As an additional precautionary measure, all equity investments must be in Investment Grade Value Shares and branched stock CEFs, thus ensuring cash flow from the entire portfolio at all times. But the main thing from day one is to make calculations of the distribution of all assets based on the position value instead of the market value.

  • NOTE: When stock prices are very high, stock CEFs provide significant returns and excellent diversification to the managed program, allowing you to participate in the exchange with less risk than individual stocks and even significantly higher returns from profitable mutual funds and profitable ETFs. gives.

The use of total “working capital” instead of current or periodic market prices allows the investor to know exactly where the new portfolio supplements (dividends, interest, deposits and trading income) will be invested. This simple step will guarantee an increase in total portfolio income from year to year and a significant acceleration towards retirement, as the distribution of assets itself is more conservative.

  • The distribution of assets should not change based on market or interest rate forecasts; forecasting income needs and minimizing retirement-ready financial risks are key issues.

3. There are several different types of income securities and

There are several basic types, but there are many variations. To keep it simple, and in a growing risk sequence, there are US Government and Agency Debt Instruments, State and Local Government Securities, Corporate Bonds, Loans, and Preferred Shares. These are the most common assortments and generally provide a stable level of income to be paid semi-annually or quarterly. (CDs and Money Market Funds are not investments, their only risk is the “opportunity” range.)

Variable-yielding securities include Mortgage Products, REITs, Single Trusts, Limited Partnerships, etc. includes. And then there are the many intricate assumptions made by Wall Street with “tranches,” “hedges,” and other strategies that are too complex to understand. to the extent necessary for prudent investment.

In general, higher yields reflect higher risk in individual income securities; increases the risk of complex maneuvers and adjustments exponentially. Current earnings vary depending on the type of security, the issuer’s underlying quality, the maturity, and in some cases, certain industry conditions … and, of course, the IRE.

4. Hhow much do they give

Mix short-term interest rate expectations (IRE, respectively), current income, and keep things interesting as earnings on existing securities change with “inversely proportional” price movements. Revenues vary significantly between types and are currently below 1% for “risk-free” money market funds, and less than 10% for oil and gas MLPs and some GYOs.

Corporate Bonds account for about 3%, preferred shares for about 5%, and most taxable CEFs for about 8%. Tax-free CEFs generate an average return of about 5.5%.

  • There are enough spreads of income opportunities and investment products for each type of investment, quality level and imaginable investment period … not to mention global and index opportunities. But without exception, closed-end funds pay significantly more than either ETFs or Mutual Funds … not even close.

It is expensive to buy and sell all types of individual bonds (there is no need to disclose the price increases and new issuance privileges on the bonds), especially in small quantities and when prices fall, it is virtually impossible to add to the bonds. Preferred stocks and CEFs behave like stocks, and it is easier to trade as prices move in both directions (i.e., it is easier to sell for profit or buy more to reduce costs and increase profitability).

  • During the “financial crisis”, CEF revenues (tax-exempt and taxable) almost doubled … almost all of them could be sold more than once, with “one-year initial interest” profits, before returning to normal levels in previous periods . 2012.

5. How do CEFs create these high income levels?

There are several reasons for this big difference in investors’ income.

  • CEFs are not mutual funds. They are separate investment companies that manage their securities portfolios. Unlike mutual funds, investors buy shares in the company itself and have a limited number of shares. Mutual funds always issue an unlimited number of shares equal to the Net Asset Value (NAV) of the fund.
  • The price of CEF is determined by market forces and can be higher or lower than NAV … so they can sometimes be purchased at a discount.
  • Income mutual funds focus on total income; CEF investment managers focus on the production of spending money.
  • The CEF raises cash through an IPO and invests the proceeds in a securities portfolio, much of which will be paid to shareholders in the form of dividends.
  • The investment company can also issue preferred shares with a much lower guaranteed dividend rate than it can get in the market. (For example, they can sell 3% of the preferred shares and invest in bonds that pay 4.5%.)
  • Finally, they negotiate very short-term bank loans and use the proceeds to buy long-term securities that pay higher interest rates. In most market scenarios, short-term interest rates are much lower than long-term interest rates, and loan terms are as short as the IRE scenario allows …
  • This “leverage borrowing” has nothing to do with the portfolio itself, and in times of crisis, managers can stop borrowing short-term until a more stable interest rate environment returns.

As a result, the actual investment portfolio includes capital that yields significantly more than the proceeds from the IPO. Shareholders receive dividends from the entire portfolio. Read the article “Investing under the Dome” for more information.

6. What about Annuities, Fixed Value Funds, Private GMOs, Income ETFs and Retirement Income Mutual Funds?

Annuities have several unique features, none of which “invest” them well. If you do not have enough capital to earn an adequate income, they are excellent security covers. “Variable” diversity adds market risk to the equation (with some additional cost) by lowering the initial fixed amount annuity principles.

  • They are “the mother of all commissions.”
  • They impose fines of up to ten years, depending on the size of the commission.
  • They guarantee you a minimum interest rate that you will receive for your “actuarial lifespan” or longer lifetime. If you are hit by a truck, payments are suspended.
  • You can either make an additional payment for the benefit of others, or to ensure that your heirs receive something when they die (ie you can reduce your payments); otherwise, the insurance company receives the entire balance no matter when you leave the program.

Fixed Value Funds provide you with the lowest income you can get in a stable income market:

  • They cover the short-term bonds to limit price volatility, so in some scenarios they may actually yield less income than Money Market Funds. For those with slightly higher yields, the insurance includes a “bandage” that provides price stability at an additional cost to the annuitant.
  • They are designed to reinforce Wall Street emphasis on the harmless and natural identity of securities that are sensitive to market price volatility and interest rates.
  • If the money market rates return to “normal” someday, these bad jokes will most likely disappear.

Private GYOs are the “father of all commissions”, illiquid, secretive portfolios, and in many ways far below the openly traded range. Take the time to read this Forbes article:
“Investment Choice to Avoid: Private GYO” By Larry Light.

Income ETFs and Retirement Income Mutual Funds are the second and third best ways to participate in the fixed income market:

  • They provide a diversified portfolio of individual securities (or mutual funds) (or track prices).
  • ETFs are better because they look and feel like stocks and can be bought and sold at any time; The obvious disadvantage of most is that they are built to track indices, not to generate revenue. Some of what appear to be a serious over 4% production (for information only and not recommended at all) are: BAB, BLV, PFF, PSK and VCLT.
  • As for Mutual Retirement Income Funds, the most popular (Vanguard VTINX) has a 30% capital component and yields less than 2% of the money actually spent.
  • There are at least one hundred “experienced” tax-exempt and taxable income CEFs and forty or more equity and / or balanced CEFs that pay more than any income ETF or Mutual Fund.

More questions and answers in the second part of this article …