ETF/No Load Fund Investing: The Income Debacle

The recent roller coaster ride in the stock market was caused by a variety of events, one of them which was a rise in interest rates.

If you held any income producing bonds, bond funds or municipal closed end funds, you undoubtedly have seen the values head south as they always do when rates are rising. Personally, I have watched the tax-free income portion of my portfolio go from about +1.50% to -3.00%.

This is a normal occurrence within an economic cycle, and you need to look at the income generating process with the right frame of mind. If you invest for income, and your funds/ETFs/CEFs pay monthly dividends, then that’s what you need to focus on. After all, the income is what will support your lifestyle and not the value of your portfolio.

Interest rates will always fluctuate and, in times of lower rates, you’ll have some potential for capital gains, while, during times of higher rates, you may see the value of your portfolio head south. Whether rates rise or fall has no effect on the underlying issuer to pay your monthly dividends, so don’t get too emotional about it.

Here’s another way to look at it. I have a friend who prefers generating monthly income from his real estate holdings. He owns several single family rental homes, which provide him with regular monthly income that he collects from his tenants.

In his area, real estate prices have come down some 20% off their highs. Translated, that means that the value of his real estate income portfolio has gone down by several hundred thousand dollars. I asked him if he was worried about that kind of price drop but his response was that he was living well off the generated income and that the value only mattered if he were to sell.

Obviously, even if he wanted to, he couldn’t just turned around and liquidate his real estate holdings overnight as you can with a bond fund. However, maybe there is lesson to be learned here, which is to focus on the purpose of your investment. If it does what it was designed to do, why worry about things that are beyond your control anyway?

However, I believe that no matter what you invest in, there should be some kind of ultimate safety net, in case the world goes haywire. Just like using the Trend Tracking Index (TTI) for growth investments, I will draw a line in the sand when I will sell my income portion. After all, I am old enough to remember 21% mortgage rates and 16% money market interest in the early 1980s.

While we may never experience that again (hopefully), my line in the sand for my income portfolio is a drop of -7%—just in case.