Investing: There’s Always Been A Cliff

Happy Holidays! I wish all y’all a happy and healthy 2018… but will the equity markets be able to extend their unprecedented, seemingly unstoppable, foray into new record high territory. Does it really matter? Perhaps not to everyone.

There’s always been a cliff: 1987, 1999, 2007; there’s always been a year-end “window dressing”

With interest rates stranded at historical lows for nine years now, the stock market side of Wall Street has benefited from a self-created image as the only game in town where reasonable “returns” can be had. Literally, millions of retirees and “savings” account/CD owners have been lured into the upward only (and much more speculative) world of index ETFs, Sector ETFs, and Mutual Funds.

Note that “returns” are not the same as spending money or income. Portfolios can have returns in double digits while producing no income at all. Wall Street rarely speaks about income. Spending money, in the normal Wall Street model, is obtained by selling securities.

Clearly, this model breaks down when even the monthly market value gains do not exceed the needed spending money… so when the stock market corrects (and it always corrects), ETF and Mutual Fund investors get clobbered.

Fortunately, while the public propaganda from the “Wizards” preaches “buy stocks at any price”, the more conservative (financially) side of the industry quietly and conveniently provides outstanding income production machines. Income and Equity Closed-End Funds (CEFs) satisfy the income and safety-of-principal needs of millions of (eventually much safer) investors.

With income purpose securities, the income almost never changes as market values fluctuate. In two of the three major market meltdowns referred to above, prices of income producers actually stabilized or moved higher… in all three, the income kept on flowing.

So an income portfolio generating 7% potential spending money at a $300,000 market valuation will generate the same dollars of income if values fall to $250,000 (negative “returns”) or if the value rises to $400,000 (positive “returns”).