Generally, a vast majority of folks, especially retirees, associate the Closed-End Funds [CEFs] with high risk, high leverage, and high fees. Many consider them unsafe and unsuitable for long-term holdings. Some others would argue that they have no place in a conservative or a retirement portfolio. Though it is easy to understand why, we tend to have a different opinion. There is no doubt that at times, their market prices can be volatile, more than the broader market-indexes or dividend stocks. It is also difficult to separate the good funds from the bad ones. We believe that in spite of their obvious risks if used with the appropriate diversification and right proportions, they can provide high-income, moderate risk in line with the broader market and at the same time provide market-matching or market-beating returns. It is not about all in or nothing; it is about the right proportions. How much is appropriate? The right amount of exposure to a specific type of investment usually depends on several factors including an individual’s goals, risk tolerance, and personal situation.
We will go over both the benefits and the risks of investing in this kind of portfolio strategy. However, we believe that there are more positives than the downsides and that’s why it deserves a place in your overall strategy. At the same time, they are not for everyone. First, if your investment pool is large and your income needs are less than 3-4% of your investment pool, there may not be a need at all to go for a higher income portfolio. Second, if you cannot tolerate slightly higher volatility (than S&P500), even while you are receiving the high income, you should probably stay away. Lastly, if you do not care about income, but just the total return, obviously these investments are not for you.
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