As of March 23, 2018, the S&P 500 (at $ 2,588.26) was down approximately 10% from its January 26, 2018 all-time high of $ 2,872.87, and was down approximately 3.2% for 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 with too high a PE and low or no dividend stocks.
- Income-focused investors (retirees and “soontobes”) holding positions in illiquid individual fixed income securities.
- 401k savings account holders whose pooled investment portfolios are, by design, overly invested in stocks.
However, it is a perfect storm of opportunity for Market Cycle Investment Management (MCIM) portfolios. The MCIM process focuses only on fundamentally strong, S & PB + or higher-ranked stocks of profitable, dividend-paying companies (investment grade value stocks). No individual shares are bought until they trade 20% below their 52-week highs.
MCIM portfolios are diversified in a number of 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-making disciplines that take the pain out of seeing important profits fade during corrections. In addition, “cost-based” asset allocation excludes the need to “rebalance” the portfolio while ensuring annual income growth with an asset allocation for income purposes of 40% or more.
As markets rise to record levels, the lack of investment opportunities in individual stocks improves with the use of fixed capital funds (CEF). 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 income purpose ‘segment’, well-diversified income SCMs (both taxable and tax-free) are used to secure above-normal income from all types of generally illiquid securities … securities that ( in MCE form) are magically available in full liquid form.
How have IGVS shares and CEFs fared in the three major collapses of our lives?
- 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 they were not a significant portfolio, but individual interest rate sensitive securities recovered as interest rates fell.
- In 1999, the shares of IGVS and most of the CEFs did not “bubble” along with the NASDAQ, and they rallied strongly during the flight to quality that followed the dotcom disaster. “No NASDAQ, no new issues, no mutual funds” was a winning creed back 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’s witch hunt. Overall, there were few dividend cuts in stocks, as IGVS companies rallied from the bottom at a slightly faster rate than the S&P 500 through 2014. However, earnings CEFs outpaced the entire market for securities from 2007 to the end of 2012, holding their dividends until 2016 or so, when CEF tax-free yields began to fall.
Therefore, while some managed portfolios may have inherent quality, diversification, and income concerns during corrections, MCIM portfolios have new investment opportunities. While some investment portfolios must deplete capital to pay retirees monthly income, the vast majority of MCIM portfolios have excess income that is used to increase capital in any market scenario.
There are four varieties of investment opportunities as of writing:
- The number of IGVS shares falling 20% below 52-week highs is growing.
- There are approximately forty mostly equity CEFs, representing a wide variety of market sectors, with current returns between 7% and 9% after all internal fees and expenses.
- There are no less than sixty-one CEF of taxable income, representing a wide variety of security types, with current returns between 7.5% and 9.5% after all internal fees and expenses.
- There is at least thirty-one CEF of federal tax-free income that pays 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 medium that provides the fuel to add positions at lower prices. The clock is ticking.
The “add at lower prices” approach is particularly effective with CEFs, where each addition:
- Lower your cost base, accelerating return on profit opportunities.
- Your dividend yield on the y increases.
- Increase the annual income of your portfolio.
What’s that old Boy Scout motto? Right …