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What Your Mother Never Told You About Income Investing: Twenty Questions (16 thru 20)

Submitted by The Investment Shadow | RSS Feed | Add Comment | Bookmark Me!

16. And Closed End Funds are different?

Absolutely. Since CEF managers, both income and equity, don't have to sell their portfolio securities to redeem ownership shares, they can take advantage of lower prices and add to their portfolios as prices in general fall. This is what private portfolio managers do --- they buy high value securities when prices fall and take profits when they go back up in price --- precisely when the public is told once again that it is safe to get back into the rising market.

This is what I practice as "Market Cycle Investment Management", and the income allocation of these portfolios take advantage of the stability and resiliency of Closed End Income Funds.

17. But what about the income from these funds during the financial crisis?

Well, as you might expect, the market prices of the CEFs fell much more than ever before. But, and this is about the biggest news in the history of the financial markets, news that was totally ignored by the financial media: the income generated by taxable income CEFs (other than REITs and mortgage heavy investment funds) actually increased during the financial crisis. The same result was experienced in the Tax Free arena, but with no exceptions at all.

18. And how low did the prices go?

It was a little scary, but not when you saw the income being maintained month after month. Naturally, the yields nearly doubled as prices fell, so it was easy to reduce the cost basis of existing positions by reinvesting the monthly income. AND, prices didn't fall nearly as much as equity prices did.

Even better, the index of income CEFs has actually outperformed both the S & P 500 and the Dow since the market scraped bottom on March 9th 2009, and not by just a small margin. Interesting, isn't it. And why is it such a closely guarded secret?

19. And these types of income investments are available to all investors?

 Yes, they sure are, hundreds of them, and have been for years. They are ignored resoundingly by investment professionals. If you call your broker and ask about them, you will be told they are unsafe because they use "leverage". This means that the management company  goes to the capital markets, like any other business, to borrow money using preferred stock, bonds, etc.

Leverage is treated as though it were a four letter word. It isn't; people buy cars with it, shoppers shop with it, and investers properly invest with it. If I can borrow at 3% and buy a 5% yielding security, why wouldn't I do so? Without leverage, we'd all be riding to work every day on bicycles, and watching construction workers digging foundations by hand!

20. Is there an easy way to learn more about Closed End Fund investing?

 Sure. After reading "The Brainwashing of the American Investor: The Book That Wall Street Does Not Want YOU To Read", investors should check out web sites like for tutorials, definitions, and screening tools. Attending one of my free Income Investing webinars would also be a good idea.