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Bond CEF Risks

IMHO bond CEFs should be classified as "equities" and not FI. 

This article talks about the risks involved with bond CEFs.

https://seekingalpha.com/article/4358656-just-how-risky-are-cefs-when-building-8minus-10-balanced-po...

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Re: Bond CEF Risks


@galeno wrote:

IMHO bond CEFs should be classified as "equities" and not FI. 

This article talks about the risks involved with bond CEFs.

https://seekingalpha.com/article/4358656-just-how-risky-are-cefs-when-building-8minus-10-balanced-po...


Old news.  Yes, CEFs should be accounted as part of your equities. In a black swan market (2008, 2020) they can lose even more.  PCI which is one of the best CEFs lost over 42% from peak to trough in 2020 while SPY lost less than 35% and QQQ was even better.

For YTD PCI+PDI are still down over 18% while SPY is +0.7 and QQQ is at 22+%.

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Re: Bond CEF Risks

Even stock CEFs are more volatile than plain vanila stock ETFs.  Bond CEFs and esp. muni CEFs even more volatile.  Would touch one.

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Re: Bond CEF Risks

I would not own bond CEFs. But....

Imagine holding 100% bond ETFs getting an 8% nominal yield. Save half. Eat half. 

2% re-invested to cover USD inflation

2% re-invested to cover declines.

4% consumed for retiree living expenses.

capecod seemed to make it work.

 

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Re: Bond CEF Risks


@galeno wrote:

I would not own bond CEFs. But....

Imagine holding 100% bond ETFs getting an 8% nominal yield. Save half. Eat half. 

2% re-invested to cover USD inflation

2% re-invested to cover declines.

4% consumed for retiree living expenses.

capecod seemed to make it work.

 


I'll admit that this approach is alluring, despite the risk of permanent capital loss.

What I fear with a 100% CEF portfolio (or heck even 50%) is a steep decline with subsequent distribution cuts.  That nominal yield of 8% could get halved or worse.  Might not be a big deal if it happens later in retirement, but what if it happens within the first couple years?

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Re: Bond CEF Risks

       Well our risk goal was automating and increasing financial security that requires less decision making as we aged. 

        We purchased most of our CEF’s (7-10% range normally) after abandoning relatively low yield stock and “safe” bond holdings during the 2009-2010 bank crisis and have received our total investment back by now so we’re playing with house money for the rest of our lives.

         The current value of their money is “down” about 20K+  and the truth is it was down well over 100k+ recently. We also lost 2% of the yearly income to date. This is in the midst of  a horrendous stress test some say is worse then the bank crisis. So we invested more. We have set up a perpetual increasing “annuity” using PIMIX that currently covers all or supplimental needs plus 28k per year reinvested at 5%+. Collecting 20-30k a year in excess to needs reinvested at 5% since 2010 provides quite a cushion for bad markets, surprise expenditures and wants.

           My point would be while some seem addicted or fearful leading to endless tinkering in pursuit of a non existant holy grail of portfolios, financial security at least to any age you choose before spend down is right in front of you if you want to “gamble” on a more sure investing return run by professionals instead of yourself.  

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Re: Bond CEF Risks


@galeno wrote:

I would not own bond CEFs. But....

Imagine holding 100% bond ETFs getting an 8% nominal yield. Save half. Eat half. 

2% re-invested to cover USD inflation

2% re-invested to cover declines.

4% consumed for retiree living expenses.

capecod seemed to make it work.

 


Sounds nice and easy but you forgot to mention 2 major points of how capecod invests.

1) He is a trader and will make chances

2) He sells to cash when he thinks the loss would be big.

You are none of the above.  And it is funny how quickly we can forget that...

PCI which is one of the best CEFs lost over 42% from peak to trough in 2020 while SPY lost less than 35% and QQQ was even better.

For YTD PCI+PDI are still down over 18% while SPY is +0.7 and QQQ is at 22+%.

So, if you think that you can trade successfully by all mean but a CEF, but wait, why not buy QQQ or AMZN?

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Re: Bond CEF Risks

Exactly. We're NOT traders. We are the opposite. We try to keep transactions to a minimum. That's why we don't/won't use CEFs or other financial assets that would require trading.

But if it COULD be done without trading....but it can't.

"Sounds nice and easy but you forgot to mention 2 major points of how capecod invests.

1) He is a trader and will make chances

2) He sells to cash when he thinks the loss would be big."

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Re: Bond CEF Risks

One of the mysteries (to me) of CEFs is that they’re owned, or I presume they’re owned (and I might be wrong here) by experienced and sophisticated retail investors—“smart money” as some people like to say. Yet they get bid up to crazy premiums, and undergo wild swings and volatility.

I used to own a basket of municipal bond CEFs. I started at the Whitney bottom, and I made excellent money. I sold them one by one as the discounts turned to premiums. PML was the last one to go.

But note that they rocketed downward when Meredith W. made her silly comments about muni bonds. Does “smart money” panic like that? Hmm, like I say, a mystery.

Anyway, I have no interest in CEFs anymore. Equities provide more than enough risk and reward.

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Re: Bond CEF Risks


@galeno wrote:

Exactly. We're NOT traders. We are the opposite. We try to keep transactions to a minimum. That's why we don't/won't use CEFs or other financial assets that would require trading.

But if it COULD be done without trading....but it can't.

"Sounds nice and easy but you forgot to mention 2 major points of how capecod invests.

1) He is a trader and will make chances

2) He sells to cash when he thinks the loss would be big."


         We’ve held basically the same CEF’s since the bank crisis, so 10-12 years. We live off their income and have received all our initial investment by now. We don’t trade them often other then to higher quality management “and” income. We may add to them each correction or market swoon, this being the first of those. We plan on never trading them or cashing them in (last) except for LTC.

         We look at them as income investments not for growth. Values don’t matter ever. We don’t think about what the future might be ever. They are glorified variable yield and value CD’s, that’s all.

          I believe you had it nailed with one of your first posts. But you do not have to go all in at 100%. We are about 48% currently. Wants and needs covered forever. Income problem solved forever.

           So the alternative is 4% rules, allocations, diversification, safety, watching and arguing about spending until you die, constant tinkering based on what you “think” (gambling) looking to control an unknown, over investing and parsing into pieces everything at lower yields hoping that keeps up with your needs and letting Mr. Market plus the wall of woe decide your future. Not for us.

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Re: Bond CEF Risks

@chang 

According to my recent reading. CEFs are traded by "mom and pop" retail investors. NOT professionals.

This is why a professional bond TRADER like capecod could have an advantage in this arena. 

 

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Re: Bond CEF Risks

@steelpony10 

So you've made good money with bond CEFs with little to no trading?

Nice!

It SEEMS possible.

"We look at them as income investments not for growth. Values don’t matter ever. We don’t think about what might ever be. They are glorified variable yield and value CD’s, that’s all."

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Re: Bond CEF Risks


@galeno wrote:

@steelpony10 

So you've made good money with bond CEFs with little to no trading?

Nice!

It SEEMS possible.

"We look at them as income investments not for growth. Values don’t matter ever. We don’t think about what might ever be. They are glorified variable yield and value CD’s, that’s all."


        Not seems, is. I did the same thing with “HY” slow growth utility stocks for 35+ years with our parents. Instead of 4% yields growing at a pace below their personal inflation rate and no future wiggle room we chose to go to 7-10% in normal times although variable, CEF’s (with no principle growth) in excess of needs and our personal inflation rate to provide a future cushion for unknowns and variable payouts. No more conceivable income needs except LTC.

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Re: Bond CEF Risks

galeno, I will give you a reason to own CEFs or other stuff. 

1) You can have 80% in indexes and use 20% to own whatever.  Example: this can be one fund(CEF) + 2 stocks.

2) Use a CEF like PCI as an "annuity". If you buy a typical fixed SPIA you give an insurance company cash, and they pay you back until you die and then the money is gone.  PCI will pay you much more and you keep the money.

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Re: Bond CEF Risks


@FD1001   He’s (galeno) claims to be a Boglehead or something whatever the bleep that is. Many posters need to be deprogrammed and broken of market timing habits first and rebuilt in steps, some baby, to accept consistent techniques of some sort. Some posts are purely for entertainment like the morning comics. They can’t all be serious, really, right? 🤞🏼🤞🏼🤞🏼

 

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Re: Bond CEF Risks

Bond CEFs are not monolithic and have different risk profiles.  Sounds reasonable for leveraged junk bond funds, including PCI and friends.  But not for government bond funds like BKT or MGF.   Though it is true there are lots more junk focused than investment grade.  I don't know much about muni funds (don't use them), but I doubt the ones that are strictly investment grade are equities.  Even if the CEF wrapper goes down big temporarily in a liquidity crisis, I'm guessing they will do better than equities in a deeper risk permanent capital loss situation.     Article is behind a paywall but my reaction to the title -- the last decade has been a beauty, good luck to all us retired folk to get 8-10% return on anything going forward from here!  

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Re: Bond CEF Risks


@jon1212 

        Correct because of lower rates currently and no inflation yet. I have to compare them to dividend paying value and core stocks as an income investor. I expect no growth and pressure is on the downside with CEF’s. With stocks you have potential to fall short of needs and you have to lose dividends to get capital gains. No investment is without flaws.

         If I remember correctly in good times these types of stocks generally raise dividends 3-5% a year in slow times less. My personal inflation rate is 2.5% or there about. CEF’s cut in half at 8-10% gives me 4-5%.

          Multi bonds CEF’s can be worldwide. If anyone can find value I put my trust mostly in PIMCO at this time and managed payout CEF’s. I’ll take real cash each month in lieu of an unknown but maybe more lucrative long term return in retirement. I do have a backup portfolio directed towards growth probably just as risky to some with PIMIX and a muni to stash excess returns.

          The last ten years have been great and actually pretty good this year considering. As far as the next ten I trust the force (experience) rather then any financial gypsies forcasting the future. Who forecasted this year?
 


 

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