Income Investing - Why isn't this easy?

by Steve Selengut

Most people (including myself) would insist that Equity Investing is the most difficult to master. After all, that is the venue for: erratic price fluctuations caused by an endless supply of social, economic, and political variables; the standard Wall Street misinformation, corporate malfeasance, self- serving financial gurus, and product sales persons; a myriad of popular and market moving speculations from IPOs to Option and Margin strategies; thousands of media talk shows and their financial markets' experts. When you think you understand the stock market brother, you are in serious trouble.
 
But more devastating than everything that has been done to turn Equity Investing into a product shopping mall of some kind, is the bottom-line/market- value brainwashing that has taken the calm, secure, and smiley-faced world of Income Investing and turned it upside down. I get more phone calls and e-mails from confused Income Investors than I ever receive from a simple plunge in Equity prices. Admittedly, very few Equity investors get to that special place, shouting "Eureka!" as they first realize that corrections in the "Shock" Market are every bit as lovable as rallies. But not recognizing that slowly rising interest rates is as much a boon for both fixed and variable Income Investors as it could possibly be a temporary set back for a struggling economy... well, that's just another example of irresponsible investor counter-education from our much too respected friends in the financial institutions.
 
Income Investors must learn to hold these truths to be self evident: (1) More interest on your invested dollars is just plain better for you than less income on your invested dollars, and the amount you have allocated to Income Investing should never change because of market factors. (2) A change in the Market Value of the Fixed Income Securities you already own has absolutely no bearing on any assumptions that could possibly be made about the credit worthiness of the issuers of the securities themselves, most of the time. (3) A change in the Market Value of your Fixed Income holdings will rarely have a negative impact on the regular recurring income that you receive and, after all, you bought these securities for the income in the first place. (4) Buying fixed income securities in a rising interest rate environment has a positive, compounding effect on portfolio yields and, at the same time, plants the seeds for future capital gains as interest rates recede. (5) Many fixed and variable income securities can be added to as interest rates rise both to increase the average yield AND to decrease the average cost of the securities.

Why is this not easy?
 
It's not easy because financial professionals and pseudo-professionals alike won't let it be. If you have a properly designed Investment Portfolio, you must view each segment separately and with an understanding of the purpose of each. Avoid advisors who consider the bottom line market value of such a portfolio as anything other than an "expectation corroborator" (and your just going to have to call me if you don't know what that is). Your portfolio market value should never be a surprise and, more importantly, it should never be looked at as something to be particularly concerned about... at least not immediately. For example, you had to be living in a cave somewhere and smoking something really special to think that your Interest Rate Sensitive (or Investment Grade equity) portfolio would be up in market value from June of 2007 through mid-March of 2008. 

You really have to learn to love the simplicity of Income Investing. Interest rate sensitivity is a given (and, by the way, interest rate expectations themselves are sensitive to inflation expectations). Price movements are both predictable and meaningless. We actually have an investment condition that approaches certainty. This is an investment nirvana, people! Don't let those guys in the pinstripes get you confused. Don't panic, don't switch, and don't cry in your beer. Look at the income number on your statement and go "hmmmm" when you see no meaningful change in either direction. (Actually, if you're doing this properly, the year over year Base Income figure should have increased.)

So the recent bad news (all of it) is really good news for investors and yes, just as higher interest rates are actually better than lower ones to a certain extent, so should lower stock prices be welcomed with more smiles than tears. Only those speculators who haven't taken their rally profits are unhappy with corrections... and that is true in both Equity and Income Securities Markets. Dealing with both events at the same time can make your bottom (line) a bit uncomfortable, but only until you recognize that smaller numbers are better for buying and that their larger cousins are best appreciated with sell orders.
 
During all types of corrections, some investment professionals will play to your fears, encouraging you to cut your losses, and to switch to something else... generally something that is cycling upwards. You don't have losses UNLESS you fall for this switching advice. Don't be pushed into such decisions no matter how smart the arguments seem. All fixed income investments (with the exception of open end Mutual Funds) are created equally and switching just doesn't work. An unhappy investor is Wall Street's best friend; so don't allow interest rate movements in either direction to affect your investment mood...


Steve Selengut
http://www.sancoservices.com
http://www.valuestockindex.com
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"