Imagine your spouse sent you to the grocery store to pick up a few regular items you use day in and day out – items with a far-off expiration date, like cans of tuna.
At the store, you discover the tuna you’ve been buying for $4 a can is now on sale for $2. What would you do?
I know what I’d do… I’d buy more cans.
If I usually bought 10 cans, I could now buy 20 for the same price. I might even double my “usual” purchase and stock up on 40 cans or more.
It’s especially galling with fixed-income investments…
When folks see the price of interest-generating bonds and notes drop… they complain about “losing money.”
That’s like griping that the tuna is on sale…
When fixed-income securities are cheap – when the tuna is on sale – that is the time to buy more of them.
Here’s the thing – we love sales.
And for our income portfolios, we like to buy fixed-income securities to generate income. Generally, these can include funds stuffed with bonds, preferred shares, or a mix of different kinds of investments.
Let’s look at bond funds as an example. These are a selection of bonds that are sold in a bundle as a fund. You buy shares of the fund to get a piece of the bonds and the interest they pay.
But, when a bond drops in price, its yield goes up… because the bond pays more interest relative to that lower price. So you’re essentially getting more bang for your buck. And as an income hunter, you’ll want to use the opportunity to buy more.
Plus, reinvesting your higher interest payments back into the fund grows your income stream even faster. And the fund can use the money it receives when its bonds mature to invest in new bonds at even higher interest rates.
So when you get lower prices in bond funds, take advantage of them and stock up on these investments like you would on cans of tuna.
Another measure we use to see if the fund is “on sale” is something called the net asset value, or NAV.
Buying funds when they’re trading at a discount to NAV is a fantastic strategy. We love doing this with closed-end funds. Closed-end funds issue a limited number of shares. So the share price can fluctuate based on investor demand… and not necessarily match what the securities in the fund are worth.
This means that closed-end funds can trade above (“at a premium to”) or below (“at a discount to”) the value of the fund’s assets. Of course, investing in closed-end funds when they trade at a premium is a disastrous idea…
But I love to invest in funds that are trading at a discount to NAV… It’s like buying a dollar’s worth of stuff for $0.80 or $0.85.
If you need a detailed refresher, my essay from August 2016 explains why buying at a discount to NAV is a solid idea. In short, the premium or discount is a measure of sentiment – how much investors love or hate the sector. Closed-end fund prices tend to move back to their NAVs over time, so buying at a deep discount is a great opportunity to boost your returns.
In my Income Intelligence newsletter, we love looking for funds that are on sale. Whether it’s a market sell-off or a discount to NAV, we scour the best investment opportunities for our readers. And after the market pullback that started in October, we’re seeing several great income opportunities today.
On top of that, I believe the recent downturn showed us something important – that now is the time to get defensive. In other words, this is the perfect time to pare back the risk in your portfolio and add well-selected income investments… so you can grow your wealth in 2019 with greater safety.
Remember, the lower the prices, the better the opportunity to secure a bigger income stream.
Use sell-offs as an opportunity to add to your fixed-income allocations at lower prices and higher yields. Lock in the income while everyone else misses out.
Here’s to our health, wealth, and a great retirement,
Dr. David Eifrig
Source: Daily Wealth