As of March 23, 2018, the S&P 500 (at $2,588.26) is down approximately 10% from its January 26, 2018 all-time high of $2,872.87, and is down about 3.2% at the year, presumably in anticipation of an impending trade war.
Additionally, interest rate-sensitive securities were trading near 52-week lows as bond and other fixed income speculators dumped inventory in anticipation of at least three interest rate hikes in 2018. .
Obviously, a market scenario like this is a challenge for:
- Major market participants (institutional investors) whose bond inventories are declining in price.
- Stock market speculators in too high PE and low or no dividend stocks.
- Income-focused investors (retired and “upcoming”) holding positions in illiquid individual fixed income securities.
- 401k savings account holders whose pooled investment portfolios are, by design, heavily invested in stocks.
But it’s a perfect storm of opportunity for Market Cycle Investment Management (MCIM) portfolios. The MCIM process focuses only on fundamentally sound, S&PB+ or better-rated stocks of profitable, dividend-paying companies (investment-grade value stocks). Individual stocks are not bought until they trade 20% below their 52-week highs.
MCIM’s portfolios are diversified in various ways, with each security paying dividends or interest. New issues, NASDAQ companies and mutual funds have no place in MCIM’s portfolios, which also have strict profit-taking disciplines that take the pain out of watching major gains fade during corrections. In addition, “cost-based” asset allocation avoids the need for portfolio “rebalancing” while ensuring annual income growth with an income-earning asset allocation of 40% or more.
While markets rally to record highs, the lack of individual stock investment opportunities is ameliorated by the use of Closed-End Funds (CEFs). These are classically diversified, ‘real-time’ tradable, managed portfolios that cover most market sectors and provide much higher than normal income (after expenses).
In the “bucket” for income purposes, well-diversified income CEFs (both taxable and tax-free) are used to secure higher-than-normal income from all kinds of generally illiquid securities…securities that (in the form of CEFs) they are magically available in fully liquid form.
How have IGVS and CEF stocks fared in the big three crashes of our lifetimes?
- In 1987, IGVS shares were the first to recover, and there were no company bankruptcies or dividend cuts; few CEFs existed at the time and were not a major portfolio, but individual interest rate-sensitive securities rallied as interest rates fell.
- In 1999, IGVS shares and most CEFs did not “bubble” along with the NASDAQ and rallied strongly during the flight to quality following the dot-com meltdown. “No NASDAQ, no new issues, no mutual funds” was a winning credo then, as it should be in the next significant correction.
- In 2008 it all fell apart and two or three IGVS financial services companies were crushed in the government witch hunt. Overall, there were few dividend cuts in stocks, as IGVS companies rallied from the bottom at a slightly faster pace than the S&P 500 through 2014. 2016 or so, when tax-free CEF yields started to fall.
Therefore, while some managed portfolios may have inherent quality, diversification, and income issues during corrections, MCIM portfolios have new investment opportunities. While some investment portfolios must exhaust capital to pay retirees monthly income, the vast majority of MCIM portfolios have excess income that is used to grow capital in any market scenario.
There are four varieties of investment opportunities as this is being written:
- The number of IGVS shares falling 20% below 52-week highs is growing.
- There are approximately forty mainly equity CEFs, representing a wide variety of market sectors, with current returns between 7% and 9% after all internal charges and fees.
- There are no fewer than sixty-one CEFs of taxable income, representing a wide variety of security types, with current yields between 7.5% and 9.5% after all fees and internal charges.
- There are at least thirty-one CEFs of federal tax-free income that pay between 6% and 6.6%, after all fees and internal expenses.
For the long-term health of your portfolio, be sure to take advantage of them… this time. It’s been ten years since the last significant market correction, and it makes sense to use an investment medium that provides the fuel to increase positions at lower prices. The clock is ticking.
The “add at lower prices” approach is particularly effective with CEFs, where each addition:
- It lowers your cost base, accelerating the return of profit-taking opportunities.
- Increases your dividend yield on the security, and.
- Increase the annual income of your portfolio.
What’s that old Boy Scout motto? Right…
