Hi. I don't understand the ins and outs of Roths because I've never had one, but high yield CEF distributions in a tax-free account look like a crazy high yield muni to the tax lads. AND they are also differently but very valuable in tax-deferred accounts like IRAs.
It is exactly what I'm doing. My roth consists of dividend producing assets, several CEFs. I am 51 and won't touch it until 59.5 or later. Currently it pays $3500/month which gets reinvested. I expect it will be paying $7000/month tax-free by the time I can withdraw. Even though it is a smaller part of my overall 401k, I hope it pays for majority of expenses. About once a quarter I review what I have and make changes. If a fund looks like it's having trouble paying the distribution, I might switch to another fund. Or if a fund has appreciated a lot, I might sell and buy another with higher current yield.
Exactly! I’ve seen enough flash crashes to know putting in a stop loss order can result in a very rude awakening. I’ve only ever used limit orders.
From what I've seen so far, CEFs are not buy and hold investments. Experienced people here are actively buying and selling. Compared to a buy-and-hold 60/40 fund like VBIAX, most CEFs that I back tested on portfoliovisualizer have larger drawdowns and lower returns over a long period say from 2016 onward. For me, I can naturally pay attention to the companies of the few individual stocks I own, or funds that track the S&P500 or Nasdaq, and make some sense. But It's harder to figure out the price movements of CEFs. Still trying to learn...
NAVs of most bond-like CEFs are still down since the fed's rate increase cycle to combat inflation. Regardless, those CEFs are reliably paying the same distribution. This is similar to buying and holding treasuries. Those treasury prices are down significantly if you bought a few years ago, but your yield doesn't change. You'll lose your shirt if you have to sell those treasuries, the same as with CEFs.
NO traded assets --- not bonds or stocks or portfolios of them in various wrappers --- are buy-and-hold investments. Drawdowns affect long-term total returns in the same way realized losses do. Every dollar of loss or drawdown avoided echoes positively through any investment horizon. And every drawdown simply "accepted" for the sake of holding assets diminishes total returns over any investment horizon.
I must respectfully disagree. One can buy and hold CEFs, or any other income investment, as long as one is a true income investor, someone with an infinite time horizon. That is, one does not intend to sell what one buys, but to use it to maximize portfolio income in perpetuity. Importantly, that is a very different strategy than someone who is a total return investor (i.e. capital gains and income), which includes anyone who sells an investment or even plans on doing so. With an infinite time horizon, one does not care if the market goes up or down, because one has no intention of realizing any gains. If anything, it helps if the market does go down so one can reinvest at a higher distribution rate. Under these specific conditions, the only concern is a distribution cut or the termination of the fund itself. Also it makes sense to use a small amount of leverage if you can get a good margin rate. Leverage increases volatility and income at the same time. If you have an infinite time horizon the volatility does not matter short of a margin call. The income always does! Regards, Paul
I think what you are seeing here is a group of pretty active traders who greatly enjoy tweaking their portfolio and moving in and out of holdings to achieve maximum gain. Nothing wrong with that, but I would argue that a lot of CEF and income investors like myself are perfectly content to buy and hold for many years. One of the services I subscribe to has very little trading of the core CEF's.
That is my strategy. In Roth: 85% CEF and BDC. for income and 15% in FBGRX for growth.
Welcome aboard 48.Hi folks....Just making a test post. Seems my old moniker name is still intact here. I am also a transfer from the Fidelity Community Forum. Good to see familiar names. I will post my CEF holdings in a separate posting. I used to know a guy who lived in Capecod...
This is approximately my 28,000 post (lifetime)!
Retiredat48...aka R48
Hi Paul. Naturally if you remove total return as the portfolio objective, then my observation is irrelevant. BUT in the world of income CEFs, such a large portion of TR are distributions and distribution reinvestments that avoiding a drawdown typically results in the generation of more income.
I agree with both of you. There are times when selling a vehicle (CEF or otherwise) makes sense. My thought is on distribution/Div cut.
Are you active or mostly buy and hold? Do you hold CEFs similar to the ones listed in this thread?
Welcome R48. Good to see you here.Hi folks....Just making a test post. Seems my old moniker name is still intact here. I am also a transfer from the Fidelity Community Forum. Good to see familiar names. I will post my CEF holdings in a separate posting. I used to know a guy who lived in Capecod...
This is approximately my 28,000 post (lifetime)!
Retiredat48...aka R48
Hi folks....Just making a test post. Seems my old moniker name is still intact here. I am also a transfer from the Fidelity Community Forum. Good to see familiar names. I will post my CEF holdings in a separate posting. I used to know a guy who lived in Capecod...
This is approximately my 28,000 post (lifetime)!
Retiredat48...
I agree with dick here. The only clear B&H asset in my opinion is a major index ETF which you purchase in some horrendous dislocation at perhaps a 50% discount to expected price. Congratulations, all 2009 SPY buyers at 67.10. That you can fire and forget. For every AAPL I can show you a ENRN, so only B&H stocks works only if you only pick winners. I believe the indexes work to pick winners and losers, and skew it in your advantage. But this is a CEF discussion.
The wisdom of Wall Street is usually just a sales pitch or tactic. For many buy and hold are sacred. But the reality of death by drawdown is hard to ignore and becomes impossible to ignore as your timeline gets shorter.
The vast majority of the distribution is return of capital so it’s like buying an annuity. Out of the .30 some cent distribution. .017 is from dividends, the rest is your money being handed back to you.
Thank you! Now I am seeing the breakdown of the ROC and Income
Thanks again Pete. Before imagining that the chart above describes the end of Western Civilization, consider several observations:
