Once upon a time, in the dark ages of income investing, there were no closed end income funds (CEFs) ... whoa!
When interest rates were expected to rise, the market prices of all "interest rate sensitive" securities fell --- thus bringing their "effective yields" more in line with what "current" interest rates were expected to be.
Wall Street, always willing to help investors deal with perceived adversity, offered this sage advice: "Have no fear, we'll just sell your old securities (salivating at the thought of another 3% markup in the pocket) and buy new ones with shorter maturities --- they won't fluctuate as much with higher rate expectations."
Neither the relationship with interest rate expectations, nor the self-serving Wall Street solution has changed: mainstream, transaction driven, market value myopic, lower-price paranoid, Wall Street sales organizations just don't get it. Actually, I'm fairly certain that they do "get it"--- they just don't want you to.
"It" is the (apparently) much too simple income investing truth that more income is absolutely always better than less income and that higher market interest rates are the only force of nature that can make higher income levels possible.
"It" is the corollary "truth" that lower prices on existing income securities of all shapes, forms, qualities, and durations generally have no impact on either the borrowers' ability to make their payments, or the amount of the payments that are being made.
"It" is the still larger truth that, when dealing with higher quality (IGVSI) equities and most classes and categories of income purpose securities, lower prices have invariably been much more of an opportunity than an adversity --- particularly when in CEF form.
Until the mid-eighties or so, only well informed major investors could buy more of lower priced preferreds or huge corporate and municipal issues --- not an easy trick for the average investor to pull off. Thus, smaller income investors were easy "marks" for Wall Street fear mongers.
But with the advent of managed Closed End Income Funds, all the hype and fear should be gone. Now all of us can dance to the interest rate cycle symphony with pretty much the same level of enthusiasm as we "Shake, Shake, Shake" with the much more energetic gyrations of the Stock Market.
If you have any sense of market rhythm, either dance is pretty easy to master --- when you use your iPod and earphones to block the commercial, fear-inciting static from lower Manhattan and the sensational (sic) investment media.
Higher interest rates and lower brokerage statement market values, do not mean that the financial sky is falling --- quite the contrary. Higher interest rates should eventually translate into higher payouts to investors; higher market values will reappear when the investment gods reverse the cycle.
Here's how your Market Cycle Investment Management (MCIM) portfolio manager will assure you of higher monthly payments down the road, without the unnecessary losses and associated media whining.
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MCIM managers focus on the "purpose" of income investing ( i.e., the income itself), recognizing that lower prices directly result in higher yields on all income securities, and normally without any change in the underlying quality of the securities themselves. Eureka!
So MCIM managers feel really comfortable about these three actions (the very same approach that (we believe) worked so effectively during the most severe financial crisis of our lifetimes):
- They add to their positions in some income CEFs using monthly income produced by the entire portfolio and additional deposits to accounts from MCIM experienced investors. This process reduces per share cost basis, increases yield per share, and increases portfolio income.
- They add new positions to their CEF portfolios, taking advantage of lower than usual prices and higher than usual yields using new deposits from investors who recognize that lower prices are opportunities for higher income and future profits. This process increases total portfolio income and overall portfolio yield, while improving portfolio diversification and safety.
- They reach out to clients, followers, and strangers even, hoping to make all income (and equity) investors as comfortable with the opportunities afforded by higher interest rates (and lower prices on quality securities) as they are.