An important through-line over the last 18 months or so, which bears revisiting, and one that underlines what the service is trying to achieve, is that the best way to maintain and grow income is to also grow portfolio wealth in a sustainable way. Broadly speaking, this takes the form of three different allocation methods. First, is to keep an eye on risk – this means tilting away from the more volatile and highly cyclical asset classes or sectors such as resources, particularly in investment wrappers prone to deleveraging. This type of allocation makes it a lot easier to keep behavioral monsters at bay that cause many to buy high and sell low. It also means more capital is available to reallocate to more attractive opportunities during the inevitable sell-offs. In other words, if what you hold drops 50% in a sell-off, it’s hard to use that as a base for reallocation into new positions. 

Secondly, it is to allocate to securities that roughly earn what they distribute. This is why there aren’t any 10% distribution-rate CEFs in the Portfolios, which tend to feature portfolio yields half that level, at best. And that’s also why there has been more focus on preferreds and baby bonds as the downtrend in yield has kept going. This keeps returns much more aligned with distributions and makes it easier to avoid funds that tend to trade at expensive valuations due to their overly high distributions. 

And thirdly, the overarching allocation theme is to move in a countercyclical way. This is why you won’t find allocations to the relatively cyclical and fragile hotel REITs or shale producers at the top of the market cycle. This doesn’t mean taking down risk exposure to zero but it means increasingly adding to more resilient sectors and investment vehicles in a barbell context. This is because periods of stretched valuations can persist for years so keeping a balanced / barbell exposure – part of the portfolio that participates in a strong market while another is ready to move into attractive opportunities – can make sense. Participating in the market can help avoiding chasing yield at the top of the market while keeping an allocation to more resilient assets provides a plan for rebalancing during drawdowns and avoids the typical buy high / sell low wealth-destroying panic dynamic.

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