Investment opportunity multiplied by two, or that’s four

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

Additionally, interest-rate sensitive securities were trading near 52-week lows as speculators in bonds and other fixed income 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 on too high PE and low or no dividend stocks.

  • Income-focused investors (retired and “next”) who hold 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 shares are not bought until they are trading 20% ​​below their 52-week highs.

MCIM’s portfolios are diversified in several ways and each security pays dividends or interest. New issues, NASDAQ companies and mutual funds have no place in MCIM’s portfolios, which also have strict take-profit disciplines that take the pain out of watching top gains fade during corrections. In addition, the “cost-based” asset allocation avoids the need for portfolio “rebalancing” while ensuring annual revenue growth with an asset allocation for revenue purposes of 40% or more.

While markets are rising to record highs, the lack of investment opportunities in individual stocks is ameliorated by the use of Closed End Funds (CEFs). These are classically diversified, “real time” traded, managed portfolios that cover most market sectors and provide much higher than normal income (after expenses).

In the “bucket” for income purposes, CEFs of well-diversified income (both taxable and tax-exempt) are used to secure above-normal income from all types of generally illiquid securities… securities that (in CEF form) they magically become available in a fully liquid form.

How have IGVS and CEF stocks fared in the three biggest crashes in 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 significant portfolio, but individual interest rate sensitive securities rallied as interest rates fell.

  • In 1999, shares of IGVS and most CEFs did not “bubble” along with the NASDAQ and rallied strongly during the flight to quality that followed the dotcom disaster. “No NASDAQ, no new issues, no mutual funds” was a winning credo then, as it should be in the next significant correction.

  • In 2008 everything fell apart and two or three IGVS financial services companies were crushed in the government witch hunt. In general, there were few dividend cuts on stocks, as IGVS companies rallied from the bottom at a slightly faster pace than the S&P 500 until 2014. 2016 or so, when tax-free CEF yields began to fall.

So 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 deplete capital to pay monthly income to retirees, the vast majority of MCIM portfolios have excess income that is used to grow capital in any market scenario.

There are four varieties of investment opportunities as of this writing:

  • The number of IGVS shares falling 20% ​​below 52-week highs is growing.

  • There are approximately forty CEFs primarily equities, representing a wide variety of market sectors, with current returns between 7% and 9% after all internal fees and expenses.

  • 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 internal fees and expenses.

  • There is at least thirty-one CEF of income free of federal taxes that pay between 6% and 6.6%, after all internal fees and expenses.

For the long-term health of your portfolio, be sure to take advantage of them… this time. Ten years have passed since the last significant market correction, and it makes sense to use an investment vehicle that provides the fuel needed to build 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 on profit-taking opportunities.

  • Increases your dividend yield on security, and.

  • Increase the annual income of your portfolio.

What’s that old Boy Scout motto? Right…

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