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Post by steelpony10 on Jan 12, 2024 20:41:15 GMT
www.fidelity.com/learning-center/investment-products/closed-end-funds/what-are-closed-end-funds We use CEF income to avoid spend down as long as possible, smooth over lulls or poor markets which would deplete a portfolio quicker and eliminate somewhat concern for values which fluctuate from the never ending daily factual and speculated bad news. When held long term eventually you get all your investment back to be dispersed somewhere else while these holdings keep right on distributing funds to you monthly or quarterly with little effort on your part until sale. I know equities can provide little for maybe years, regular bonds provide little protection of our purchasing power after taxes which goes for cash and CD’s also. It is our third investing rail to compensate for the other two.
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Post by steadyeddy on Jan 13, 2024 14:06:12 GMT
www.fidelity.com/learning-center/investment-products/closed-end-funds/what-are-closed-end-funds We use CEF income to avoid spend down as long as possible, smooth over lulls or poor markets which would deplete a portfolio quicker and eliminate somewhat concern for values which fluctuate from the never ending daily factual and speculated bad news. When held long term eventually you get all your investment back to be dispersed somewhere else while these holdings keep right on distributing funds to you monthly or quarterly with little effort on your part until sale. I know equities can provide little for maybe years, regular bonds provide little protection of our purchasing power after taxes which goes for cash and CD’s also. It is our third investing rail to compensate for the other two. If we end up with steadily raising interest rates for a long time, won't CEFs drain the NAV due to leverage costs in the name of distributing your original capital? Just thought I ask.
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Post by Broozer on Jan 13, 2024 14:44:51 GMT
www.fidelity.com/learning-center/investment-products/closed-end-funds/what-are-closed-end-funds We use CEF income to avoid spend down as long as possible, smooth over lulls or poor markets which would deplete a portfolio quicker and eliminate somewhat concern for values which fluctuate from the never ending daily factual and speculated bad news. When held long term eventually you get all your investment back to be dispersed somewhere else while these holdings keep right on distributing funds to you monthly or quarterly with little effort on your part until sale. I know equities can provide little for maybe years, regular bonds provide little protection of our purchasing power after taxes which goes for cash and CD’s also. It is our third investing rail to compensate for the other two. If we end up with steadily raising interest rates for a long time, won't CEFs drain the NAV due to leverage costs in the name of distributing your original capital? Just thought I ask. I have no idea.
I've had HYI for a couple years now, main reason I got it was that it is not leveraged, still paying close to 10% (junk).
But they're folding it up the end of 2025 as I recall, so I'll try to find another non-lev CEF. I bought EVV a few months ago, a short-term CEF (5 years max). Maybe I'll just put the funds in that, although it is leveraged. But I would prefer to find a non-leveraged CEF, with a long track record, but haven't really looked yet.
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Post by steelpony10 on Jan 13, 2024 15:11:24 GMT
Broozer, I saw near 20% prime in the 70’s so this seems like not much to me. I watched AUM and saw where the money was going in the past. Same as now the worse choices first, cash and CD’s rather the investing in dividend and distribution payers on sale. For sure borrowing will slow the bond IOU types and the equity types will slow also so you are correct. Distributions will decrease, premiums will decrease and discount will increase. So given the choice of spending down devalued equities, fleeing to cash and CD’s or more conventional bonds I would choose investing instruments that might pay out 6%+ distributions (or dividend payers of solid companies for the faint of heart) to maintain purchasing power as long as I could then I would deplete cash, conventional bonds and in my case equities before CEFS. This is the same pattern I used depleting my mom’s portfolio for LTC. All investments are flawed so I’m comfortable with CEF flaws. Now we have a third war, an election involving two future lame duck geezers with China in the shadows and the economy needs to slow probably by a recession. As I’ve said before too much high jingo which could last another 5 years plus. I’ll still have cash flow in excess to needs to burn through first. You know leverage is used to goose up distributions? Asking for reliable higher distributions without leverage is tough to find. How about relying on good managers like PIMCO where there’s top institutional knowledge. Specifically PTY (10%) or another manager UTG (8%) to start. Mid leverage. You can’t avoid distribution cuts if you have long bad markets that seem to be getting worst like this one. That’s my reason for excess to needs distributions and a substantial investment in PONAX, slop and backup.
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Post by FD1000 on Jan 13, 2024 15:25:20 GMT
If you read the article, non of the explanations support what comes after. I have attended many FREE dinners with financial advisers. The one common thyme is always "you must replace your income" and then comes all the higher income products, from high-div stocks to annuities. CEFs hardly mentioned but it's close relative. Do you wonder why so many "experts" want to promote these products while simple stocks+bonds OEFs are the building blocks of a sound investment that you can find in the best books/research by the best real experts of investing. The fact is that you don't need generated income. Investment have 2 basic concepts performance and SD/risk. As I said before, I can use a fund like FXAIX(Fidelity SP500) and set up in 2 minutes a monthly sell of someone expenses and let it run for years. Selling shares doesn't deplete the portfolio quicker. It is all a simple math question/problem. CEFs volatility is as high as stocks sometimes lower and sometimes higher. BTW, just because something works by someone it doesn't mean it's the best. I used to play tennis with a guy that sold his company in the early 90s for millions , he has been at 90+% Munis, he is doing OK, is this the most effective? Generating income should never be your highest goal, the most important is someone's portfolio size and volatility. Nothing in the above discuss what I do, please don't bring up my methods. It is all about generic investment ideas. I was asked by relatives, friends and hundreds others in private messages what to do as accumulators or retirees. I offered many generic opinions, never recommended CEFs. This is what I offered a relative more than 20 years ago(fd1000.freeforums.net/thread/11/simple-case-when-retirement). Of course it's your money, you can do whatever you want.
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Post by steadyeddy on Jan 13, 2024 15:44:14 GMT
FD1000 makes valid points. I like the conviction steelpony10 has on cash flow. I guess many roads to Dublin...
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Post by fishingrod on Jan 13, 2024 16:34:44 GMT
"Selling shares doesn't deplete the portfolio quicker."
Quicker than what? I am not sure I agree fully. While reaching for yield can be detrimental to your portfolio. Generating safe income to rely on for withdrawals rather than selling shares when the stock market is down certainly makes sense. Withdrawal studies have revealed that.
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Post by retiredat48 on Jan 13, 2024 17:28:54 GMT
I just posted this on a nearby forum: ------------------------------------------------
OK, some more on why RISING RATES (not falling rates) will be BENEFICIAL to bond funds including the CEF, PDI.
Quick and fast rising rates (from zero) are not beneficial to bond funds. We just recovered from a historical fed venture to zero percent rates for more than a decade, and quick rising rates, where best was to be out of bond funds. A thing called "convexity" also can play havoc on portfolios with very low rates; NAV price declines are accentuated--not discussed here now).
Presently we have returned to a historically set of interest rates typical of the bond market.
First point. I looked up for PIMIX bond fund, and got this from M*: average weighted price of 90. (PDI is 81). This means bonds in PIMIX are selling mark-to-market at below par of 100. So for each bond PIMIX bought for $1000, the current value is $900. Yield is around 7% at current market price for pimix.
So let's say rates go up by 1% across the board. Fund managers have two choices. They can hold each bond to maturity, about 6 years, at which time they get back (barring default) the full principal value of $1000. Thus there is a built in capital gain in both PIMIX and PDI.
OR, second option, the one usually taken, is the fund manager sells off the $900 value bond today, and reinvests it buying longer duration ones with the new, higher rate. THIS IMMEDIATELY INCREASES THE EARNED INCOME FOR THE FUND...thus enabling a rising dividend to be paid. Note also that if a fund has a goal of lets say intermediate term bond fund, then as older bonds mature, they become shorter term, and act like shorter term, and are usually sold off. So rollover is happening a lot. The fund managers act like bond-ladders.
The new added income eventually offsets any decline in NAV going on for underlying bonds. In the long run, slowly rising rates helps more than slowly falling rates.
Consider PDI currently at 14% yield on price. The real concern was PIMCO may lower its cash payout/dividend. I thought this was likely in Q4. Didn't happen. If pimco can keep rolling over current bonds into higher coupon ones, they can increase cash input...net investment income. But hey, even just maintaining the current cash payout would be an achievement. Because with a 14% yield and stable dividend (has not been cut to date), investors will realize the good investment aspects and buy up the fund/bonds, raising the price, and lowering the yield. So, a current 14% yield PLUS cap gains can do better than a 10% CAGR going forward. Remember, bond yields usually change slowly. It took 33 years to go from 14% yield down to 2% yields. It is this slowness that allows bond managers such as PIMCO or Jeff Gundlach of Doubleline to do their pro magic/advantage.
Now let's discuss the yield curve...now inverted. If we get to a normal yield curve, where long term rates are higher than short, it will be beneficial...just like net investment income is beneficial to banks having rising yields/lower short term costs. The way to get yield curve back to normal is for short term rates to fall (fed controlled) and longer term rates rise. This will happen some day. Both are good for PDI. Lower short term rates reduce borrowing costs to leverage. Higher long term rates is what they rollover bonds into, increasing cash returns/income. Fed expectations are to lower short term rates this year.
So PDI owned (among other things) some 3% mortgage instruments and rates went to 7%. PDI had to mark-to-market such bonds at a decline/loss. Par 81. But as discussed before, the mortgagee folks can only pay off at 100%, no discount...so a built in cap gain. Or pimco can sell of the instrument and invest in 7% mortgages greatly increasing cash returns. If short term rates fall this year as projected by fed, short borrowing costs will fall. So pimco will leverage the new 7%, getting perhaps 10+% net return in the normal world. Borrow short/invest long...with a normal slope yield curve.
All happy in CEF world. BTW note PDI is quietly rising...and rising, in share price last quarter. Hmmm.
For rac, who is engineering/math based, best to test things is to take them to extreme limits. OK, rates in the future fall to zero across the board. Bad for bond funds because, while you have cap gains, you now earn 0% going forward annually. A bad fixed income product.
Let's take rates to 14% (has happened in the past). PIMCO will keep rolling over all their bond funds till eventually the fund achieves a 14% equivalent return...great for bond holders and total return. And by the "bond rule of thumb" you the investor do not lose along this path if you keep reinvesting the dividends and hold to duration. And each year is a new set of yields/durations if one is buy and hold investor.
Yes, I see a normal path for cef PDI to easily achieve a 10% CAGR going forward for next five years; I expect higher.
Comments/questions requested. I am not a bond expert!
R48
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Post by steelpony10 on Jan 13, 2024 17:58:43 GMT
fishingrod , To clarify spend down investors forced to sell shares in poor markets, corrections, recessions. My bad I guess. I don’t think studies personally apply to my personal situation or goals as my situation changes. I think for me I have a tool to adapt quickly with a dependable solution without relying on unknowns. The OP was for people who don’t know what CEF’s are. Maybe I took it off course.
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Post by steelpony10 on Jan 13, 2024 18:10:53 GMT
steadyeddy , Broozer , FD1000 , fishingrod , retiredat48 , Listen if anyone doesn’t want to discuss CEF’s, aren’t interested or want to be critical post somewhere else. I try real hard not be be critical of all the misinformation posted on here by just laughing shaking my head and moving on. As an anonymous poster you can claim anything you want, big deal. Quit ruining other peoples threads. Have some manners.
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Post by retiredat48 on Jan 13, 2024 18:18:16 GMT
steelpony10 ,...poster steadyeddy asked: "If we end up with steadily raising interest rates for a long time, won't CEFs drain the NAV due to leverage costs in the name of distributing your original capital?" My post was in response to him, and was about CEFs, namely PDI. If you consider my post was outside scope of thread, I will honor that. R48
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Post by steelpony10 on Jan 13, 2024 18:19:47 GMT
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Post by archer on Jan 13, 2024 18:27:24 GMT
retiredat48 , Please let me know if I am understanding correctly: Bond funds can benefit from both lowering and raising interest rates, but, there is a point where this falls apart, like <~5% due to convesity? And, the reason PDI has suffered over the past years (post covid)is due to rising rates in a sub 5% environment? I don't have a good grasp of convexity, but I can see how rates going from 0 to 5% can be more challenging than going from 5 to 10%. However, if inflation becomes extremely stubborn and interest rates were to go from 4 to 16% would the principles you site still hold true? Lastly, given how bond fund managers work in response to both raising and lowering interest rates, is there an optimum rate of change (speed) for rate changes such that rates increasing or decreasing to quickly or perhaps too slowly works against managers being able to make changes to their PFs? Thanks for your thorough post above!
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Post by keppelbay on Jan 13, 2024 18:29:36 GMT
$$ are fungible. Total return matters, but not whether they come from an income producing security or from selling shares to take gains. What matters more, in my view, is having enough to meet your needs (and the flexibility to adjust to circumstances). While I respect FD1000's conviction in his methods, steelpony10 points out that there is more than one way to get a reliable cash flow to meet retirement needs. Below I've rephrased a couple of earlier posts from other threads on how I use FI CEFs as part of an income based approach to managing retirement funding: I focus on growing the income stream. The key is underspending, and investing the excess to grow future income. Income in excess of needs is rolled over into new income producing assets. Steady growth of the income stream should accomplish the same thing as growth of equity value to cover future spending needs and acount for inflation. I decided to trial-run this while I was still working. Starting early, I felt free to experiment. If I didn't like the resuls, I could (a) try something else, (b) stay employed to 'fix' it. I didn't need plan B and was able to retire early. My income from invested capital has grown by more than 40% since I retired in 2017 and started living off the cash flow. As of now my portfolio is ~80% fixed income, of which 45% is in FI OEF and 35% in FI CEF (PIMCO features prominently in this mix). The remainder is 5% cash, 5% alternative & 10% equity. I view the FI CEFs as bearing equity-like risk, so my risk allocation is close to 50:50. I don't view this as a fixed target, just where I happen to be at the moment. I can dial the allocation to FI CEF up or down to adjust cash flow in response to my sense of market risk / opportunity. pros: - Steadily growing income stream, in excess of spending needs. - Portfolio continues to grow. No net drawdown so far. - income growth exceeds inflation (so far). - deciding where to invest excess cash suits my temperment better than deciding what to sell and when, in order to generate the cash I need to spend. cons: - not tax efficient. - Portfolio growth was keeping pace with the growth of the S&P500, but has lagged recently, mostly due to FI CEFs in 2022. While this has impacted total portfolio value, it has provided an opportunity to buy more of the same cash flow stream at lower prices This has markedly grown income. Meanwhile, CEF NAVs and mkt prices seem to be starting to recover. (none of my PIMCO CEFs had to cut distributions due to rising leverage costs during this rate hike cycle, and a few other CEFs have raised distributions). conclusion: - this approach survived the recent stress test of rapidly rising US rates - bruised but not broken.
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Post by steadyeddy on Jan 13, 2024 18:30:05 GMT
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Post by keppelbay on Jan 13, 2024 18:34:01 GMT
steadyeddy , Broozer , FD1000 , fishingrod , retiredat48 , Listen if anyone doesn’t want to discuss CEF’s, aren’t interested or want to be critical post somewhere else. I try real hard not be be critical of all the misinformation posted on here by just laughing shaking my head and moving on. As an anonymous poster you can claim anything you want, big deal. Quit ruining other peoples threads. Have some manners. As OP, steelpony10, you get to make the call, but I think retiredat48 's comments will be helpful for folks who don't think as much about how FI funds and specifically FI CEFs work.
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Post by rhythmmethod on Jan 13, 2024 18:58:45 GMT
steadyeddy , Broozer , FD1000 , fishingrod , retiredat48 , Listen if anyone doesn’t want to discuss CEF’s, aren’t interested or want to be critical post somewhere else. I try real hard not be be critical of all the misinformation posted on here by just laughing shaking my head and moving on. As an anonymous poster you can claim anything you want, big deal. Quit ruining other peoples threads. Have some manners. As OP, steelpony10 , you get to make the call, but I think retiredat48 's comments will be helpful for folks who don't think as much about how FI funds and specifically FI CEFs work. I don't think it is retiredat48 comment that Mr. Pony was referencing. Rather another poster that can't help dragging any topic into ther mud. Usually referencing his ability to a superior solution that is usually off -topic. Oh Well, 🤷🏼♂️
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Post by steelpony10 on Jan 13, 2024 19:02:19 GMT
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Post by steadyeddy on Jan 13, 2024 19:04:13 GMT
I want to retain my affable persona on this forum - call me paranoid 😥
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Post by steelpony10 on Jan 13, 2024 19:04:14 GMT
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Post by steelpony10 on Jan 13, 2024 19:05:07 GMT
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Post by steelpony10 on Jan 13, 2024 19:14:28 GMT
Someone was ripping CEF’s apart and then said they didn’t know much about them. So start at step one. I was surprised so far about Broozer ,s comments concerning leverage and expecting higher distributions. There is a basic concept to understand. If one doesn’t except the old school higher risk can lead to higher reward stop there.
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Post by FD1000 on Jan 13, 2024 20:18:30 GMT
"Selling shares doesn't deplete the portfolio quicker."
Quicker than what? I am not sure I agree fully. While reaching for yield can be detrimental to your portfolio. Generating safe income to rely on for withdrawals rather than selling shares when the stock market is down certainly makes sense. Withdrawal studies have revealed that. quicker than stock fund. TR tells you everything. The attachment below shows that PDI lost over 40% in March 2020, while QQQ lost only over 20%. That means that at the bottom, a one million portfolio in PDI lost over 40%(at that moment you PDI worth was under $600K), regardless of the income, and since the distributions(income/yield) is one part of the TR. Only TR counts. It's just math. If it is not, we need to rewrite all the investment principals. At the end of 2020, PDI was still lower than QQQ (from 3/3/2020), and again, TR rules. If retiree needed $4K monthly the math would not be different. PDI would still be worth much lower. See PV ( www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=5UMmniUhFBO1BjxybVec2x). QQQ hardly paid income and you had to sell shares, QQQ was still much higher. To be fair, I ran the above without a $4K withdrawal and found out a tiny advantage for PDI. My results show that without withdrawal: QQQ made 35.9% more than PDI for 04-12/2020... with withdrawal: QQQ made 35.6%...basically negligible. BTW, my posts on this thread are all about buying and holding funds for many years, think decades. If you replace funds then the discussion is completely different. Attachments:
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Post by fishingrod on Jan 13, 2024 20:34:22 GMT
FD1000, While you were on vacation I believe Mustang started a thread on withdrawing from a portfolio. Roughly it showed that SOR sequence of returns risk can devastate a portfolio during the withdrawal stage. An all stock SP500 portfolio over a 20+ year period underperformed a balanced portfolio when withdrawals were taken into account. I want take it off course anymore.
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Post by FD1000 on Jan 13, 2024 20:39:48 GMT
FD1000 , While you were on vacation I believe Mustang started a thread on withdrawing from a portfolio. Roughly it showed that SOR sequence of returns risk can devastate a portfolio during the withdrawal stage. An all stock SP500 portfolio over a 20+ year period underperformed a balanced portfolio when withdrawals were taken into account. I want take it off course anymore. We are not discussing a portfolio in a vacuum. I'm talking stocks VS CEFs, not VS bonds (="safer" bonds). Example: is a portfolio at 25/25/50 stocks/CEFS/bonds better than 50/50 stocks/bonds when you hold for decades. I argue that you don't need CEFs based on risk-adjusted performance based on math and investment principals. If CEFs were superior to stocks, every book/article/expert on the planet would recommend CEFs, after all, CEFs are an older product than OEFs.
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Post by fishingrod on Jan 13, 2024 21:08:58 GMT
Here is the link.
You are discussing something other than what the OP started with, as usual. I am to. Let's leave it at that.
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Post by steelpony10 on Jan 13, 2024 21:43:12 GMT
I haven’t experienced all of this yet but this is my understanding. Feel free to correct any misstatements.
Another feature of CEF’s is ROC which seems to be used by most at times. If I held a CEF in a taxable account and already received all my investment back as a buy and holder this becomes a non taxable distribution to me. ROC is considered receiving your own money back and is non taxable.
Another benefit of investing at a discount is if a CEF liquidates you receive the NAV value not your share price,
All bonds trade in a range. Our muni and PONAX ranges are narrower then our CEF’s because CEF’s use leverage to goose up distributions and have a fixed # of shares. Equity ranges are wider still with individual stocks the widest. This follows a lower risk to higher risk pattern to principle it seems.
Unlike an OEF CEF cash holdings are small while OEF’s need cash reserves for redemptions. More money is working for the investor. .
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Post by yogibearbull on Jan 13, 2024 22:13:09 GMT
steelpony10 , basically, the ROCs aren't taxed and reduce the cost basis (and major brokers do this automatically). But in the unusual situation when the cost basis becomes 0, then the entire ROC becomes taxable. For several years, I have been posting about the distinction between the old perpetual CEFs like PDI, and newer term-structure CEF cousins such as PDO, PAXS, etc that will liquidate at NAV in 12.0-13.5 years. So, I have been trading among PDI, PDO, PAXS. Finally, I have news - TR is not everything. The SOR risks become high during the decumulation phase and only withdrawal-based measures like SWR, SWRM, PWR capture this risk, not TR, SD, Sharpe Ratio, etc. It shouldn't be necessary to rehash that all over again.
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Post by steelpony10 on Jan 13, 2024 22:20:40 GMT
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Post by Broozer on Jan 13, 2024 22:30:05 GMT
Broozer , You know leverage is used to goose up distributions? Well sure. That's why I mentioned having one that was not leveraged (to lower my PF risk a bit) and maybe replacing it this year. But I don't have to replace it with a CEF -- leveraged or not -- to meet my RMDs. I actually have more in Janus' multi-sector JMUTX than in any of the CEFs I have. I've had it for around four years; last month it paid 6.9%. I have over 10% of my PF in Schwab's MM, paying 5.2x%.
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