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There are two important things that your mother never told you about Income Investing: (1) Higher Interest Rates are good for investors, even better than lower rates, and (2) Selecting the right securities to take advantage of the interest rate cycle is not particularly difficult.

Higher Interest Rates are the result of the Government's efforts to slow a growing economy in hopes of preventing an appearance of the three headed inflation monster. Your total income could well have decreased during the period as higher interest rate holdings were called away (at face value), and reinvestments were made at lower yields!

How many of you have mental bruises from the realization that you could have taken profits during the downward trajectory of the cycle, on the very securities that you now lament over. Wall Street loves these securities because they command the highest possible trading costs' costs that need not be disclosed to the consumer, particularly at issue.

Unit Trusts are traditional securities set to music, a tune that generally assures the investor of a higher yield than is possible through personal portfolio creation. Trading opportunities, the very heart and soul of successful Portfolio Management, are practical

When is 3 percent worsen than 6 percent? Yeah, we all know the answer, but only until the prices of the securities we or ever own open to fall. Then, logic and mathematical perspicacity disappear and we shift into susceptible to all kinds of special cures for the periodic onset of higher interest rates. We’ll be told to sit in cash until rates stop rising, or to sell the securities we own now, hitherto they lose even more of their precious Market Value. Other gurus will suggest the purchase of shorter-term yoke or CDs (ugh) to stem the tide of the perceived erosion in portfolio values.

There are two important things that your mother never told you close by Income Investing: (1) Higher Interest Rates are good for investors, even acculturate than lower rates, and (2) Selecting the right securities to take whip hand of the interest rate cycle is not particularly difficult.

Higher Interest Rates are the result of the Government’s efforts to slow a growing economy in hopes of preventing an image of the three headed inflation monster. A quick glance over your shoulder might remind you of recent times when the government was trying to heal the wounds of a misguided Wall Street vilify on traditional investment principles by lowering interest rates. The strategy worked, the economy rebounded, and Wall Street is trying to scramble back to where it was nearly six years ago.

Think almost the impact of irregular interest rates on your Income Securities during the past five years. iron and Preferred Stocks; Government and Municipal Securities; they all moved higher in Market Value. Sure you felt wealthier, but the increase in your ledger Spendable Income got smaller and smaller. Your total income could well have decreased during the period as higher interest rate holdings were named away (at face value), and reinvestments were made at lower yields!

How many of you have mental bruises from the realization that you could have taken profits during the downward trajectory of the cycle, on the very securities that you now lament over. The nerve; falling at the nadir the price you paid for them years ago. But the income on these turncoats is the same as it was in 2004, when their prices were ten or twenty percent higher. This is the work of Mother Nature’s financial twin sister. It’s like acorns, snowfalls, and crocuses. You need to dress properly for seasonal changes and invest properly for cyclical changes. Remember the days of mute Bonds? There was never a whisper well-nigh Market Value erosion. Was it the IRS or Institutional Wall Street that took them away?

Higher rates are good for investors, particularly when retirement is a factor in your investment decisions. The more you receive for your reinvestment dollars, the more likely it is that you won’t need a second job to maintain your standard of living. I know of no retail entity, from grocery store to cruise line that will understand the Market Value of your portfolio as payment for goods or services. Income pays the bills, more is without exception meliorate than less, and only increased income levels can protect you from inflation! So, you say, how does a person take relevance of the cyclical nature of interest rates to garner the best possible income on investment quality securities? You might also ask why Wall Street makes such a fuss up and down the dismal bond market and offers more of their patented Sell Low, Buy High advisories, but that should be fairly obvious. An unhappy investor is Wall Streets best customer.

Selecting the right securities to take contribute to of the interest rate cycle is not particularly difficult, but it does require a mount in focus from the statement gill line… and the use of a few security types that you may not be 100% puff with. I’m going to account as that you are familiar with these investments, each of which could be considered (from time to time) for a spot in the well diversified Income Portion of your assets Allocation: (1) The traditional individual Municipal and Corporate Bonds, Treasuries, Government organ Securities, and Preferred Stocks. (2) The eyebrow raising Unit Trust varietals, narrow-minded End Funds, Royalty Trusts, and REITs. [Purposely excluded: CDs and Money Funds, which are not investments by definition; CMOs and Zeros, mutations developed by some sicko MBAs; and Open End Mutual Funds, which just can’t work insomuch as they are really “managed by the mob”… i.e., investors.]

The market rules that couple to all of these are fairly predictable, but the expertise to create a safer, higher yielding, and flexible portfolio varies considerably within the security types. For example, most people who invest in Individual bond wind up with a laundry list of odd lot positions, with short durations and low yields, designed for the build of that smiling guy in the big corner office. There is a preferred way, but you have to focus on income and be willing to trade occasionally.

The larger the portfolio, the more likely it is that you will be able to buy round lots of a diversified group of bonds, preferred stocks, etc. But regardless of size, individual securities of all kinds have liquidity problems, higher risk levels than are necessary, and lower yields spaced out over inconvenient time periods. Of the traditional types listed above, only preferred stock holdings are easily additional to during upward interest rate movements, and demeaning to take profits on when rates fall. The downside on all of these is their callability, in best-yield-first order. Wall Street loves these securities as long as they wish the highest possible trading costs… costs that need not be disclosed to the consumer, particularly at issue.

Unit Trusts are traditional securities set to music, a tune that generally assures the investor of a higher yield than is possible through personal portfolio creation. There are several another advantages: instant diversification, quality, and monthly cash flow that may include principal (better in rising rate markets, ya follow?), and insulation from year-end swap scams. Unfortunately, the Unit Trusts are not managed, so there are few fund gains distributions to smile about, and once all of the securities are redeemed, the party is over. Trading opportunities, the very heart and soul of successful Portfolio Management, are practically non-existent.

What if you could own lower stock in companies that manage the traditional Income Securities and other recognized income producers like real estate, energy production, mortgages, etc.? shut End Funds (CEFs), REITs, and Royalty Trusts demand your attention… and don’t let the idea of “leverage” spook you. AAA + insured corporate bonds, and Utility Preferred Stocks are “leverage”. The sacred 30-year Treasury Bond is “leverage”. Most corporations, all governments (and most private citizens) use leverage. Without leverage, most people would be commuting to work on bicycles. Every CEF can be researched as part of your selection process to determine how much leverage is involved, and the benefits… you’re not going to be happy when you realize what you’ve been talked out of! CEFs, and the other Investment five securities mentioned, are managed by professionals who are not taking their direction form that mob (also mentioned earlier). They provide you the opportunity to have a properly structured portfolio with a significantly higher yield, even in agreement with the management fees that are inside.

Certainly, a REIT or Royalty Trust is more risky than a CEF comprised of Preferred Stocks or Corporate Bonds, but here you have a way to participate in the widest variety of fixed and variable income alternatives in a much more manageable form. When prices rise, profit taking is routine in a liquid market; when prices fall, you can add to your position, increasing your yield and reducing your cost essence at the same time. Now don’t start to salivate in connection with the prospect of throwing all your money into Real Estate and/or Gas and Oil Pipelines. Diversify properly as you would with any other investments, and make sure that your living expenses (actual or projected) are taken care of by the less risky CEFs in the portfolio. In bond CEFs, you can get un-leveraged portfolios, state specific and/or insured Municipal portfolios, etc. Monthly income (frequently expanded by champion gains distributions) at a level that is most often significantly top than your bond crowd can obtain for you. I told you you’d be angry!

Another feature of Investment associate shares (and please stay away from gimmicky, passively managed, or indexed types) is somewhat surprising and difficult to explain. The price you pay for the shares frequently represents a discount from the market value of the securities contained in the managed portfolio. So instead of buy a diversified group of illiquid individual securities at a premium, you are reaping the mercy of a portfolio of (quite possibly the same) securities at a discount. Additionally, and unlike regular Mutual Funds that can issue as many shares as they like without your approval, CEFs will give you the first shot at any cumulative shares they intend to distribute to investors.

Stop, put down the phone. Move into these securities calmly, without taking unnecessary losses on good quality holdings, and never buy a new issue. I meant to say: sheer never buy a new issue, for all of the usual reasons. As with individual securities, there are reasons for unusually high or low yields, like too much risk or poor management. No matter how well managed a junk bond portfolio is, it’s still just junk. So do a little research and spread your dollars in all directions the many management companies that are out there. If your guide tells you that all of this is risky, ill-advised foolishness… well, that’s Wall Street, and the baby needs shoes.

The final first draft in this Income Investing trilogy will be on managing the Income Portfolio using the Working banner Model.

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