The 2020 Correction, Just 4.5 Months In... Relax, Strategize
It's hard to believe that this correction is still in its early stages, but compared with other "meltdowns" of this magnitude, it certainly is. In 1987, a good set of profit taking strategies through August and the buying/trading of high quality dividend payers after the "computer loop" crash would of had you back to even in about a year... several months before the stock market established a new high.
A portfolio heavy into Investment Grade Value Stocks, and 40% or so in income purpose securities (particularly with a "no NASDAQ, No Mutual Funds, No IPO" discipline) would have had you rallying through the stock market's spectacular dot.com bubble bursting and beyond.
- NASDAQ stayed below it's 1999 ATH (all time high) for fifteen years... even with the FAANG explosion!
This "hit" that we're experiencing now is somewhat similar to the "financial crisis" a dozen years ago, in the way it has seriously impacted the market values of both growth and income purpose securities, BUT this time around, the income Closed End Funds are not leading the march to new market value highs as they did then.
- My guess is that this is due more to the prospect of several more years of near zero interest rates than it is to other forms of economic fear... distributions on many income CEFs had been lowered long before COVID-19 reared its ugly head.
Since my managed CEF portfolios achieved all time market value highs in mid February, one third of the positions inside have reduced their distributions; 13% have done so more than once. Still, through June, both monthly income production and working capital in managed portfolios have been growing steadily. Most of this growth is due to the very fact that CEF prices have NOT rebounded as quickly as individual equity prices (so far)!
Why? Because withdrawals from all accounts have been reduced, and because we've had four solid months of adding to positions at 25% higher yields than those available prior to mid February. We've also had a good number of "strategic" profit taking opportunities, as a direct benefit of market volatility.
- The average yield on Equity (growth purpose) CEFs that have cut distributions is roughly 9.5%, the same as it is for those that have not made any reductions.
- The average yield on Income CEFs that have made no distribution reductions is 9.77%... 9.19% for those that have.
Certainly, investors who have added to portfolios during the correction have helped make their portfolio pictures brighter, but few individual portfolios that added to positions at lower prices have not gained (income and working capital ground) through June.
My strategy for CEF portfolios going forward, both income only and balanced, is to continue to reinvest all income and deposits mostly in existing positions to increase per share yield and decrease per share cost basis... the lower cost basis will produce profits sooner, when prices begin to rise broadly again.
- I also find that starting with the lowest total cost positions first ( down at least 10%) produces the largest change in current yield, cost basis, and profit potential.
When profits are taken (or deposits made), some new positions will always be added, again with the hope of producing profits more quickly. So long as average yields are in the 8.5% to 9+% area, I'll not hesitate to take a much smaller than usual profit in one position in order to increase the yield and profit potential of several others.
From an income production perspective, the slower the rise to new market value highs, the better! So be patient, relax, and let compound interest and reinvested profits bring your annual income production into double digits for 2020.
My articles always describe aspects of an investment process I have been using since the 1970's, as described in my book, "The Brainwashing ...
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