What is the point of investing in income shares only to see their value drop more than the income.
You look at them and go, great company, great yield, why is it falling?
It is falling because the big investors are institutional. The private investor has long been squeezed out of the market and the remaining speculators don’t do ‘income.’ Only a handful of people like me and you invest for income. Income private investors are like prairie buffalo. You hear about them in the media but they are not as common as their reputation will have you believe.
Why would you invest in income shares when its clear the market considers them poison. Oh low interest rates will see them rise… nope. They are defensive shares in a slump, that will see them rise… nope.
So why do they go up and down?
They move because of carry trades, where institutions borrow money to buy the share to reap the dividend which is bigger than the cost of borrowing. The rest of the market is off chasing its tail shadowing the index and chasing the latest bankable fashion.
When interest rates go up you would think that profit would push down these shares and it will a little but as it didn’t rise them when they fell it wont drop them when they rise. What drives them is money supply. What drives them is the ease of borrowing money. It’s a dull end of the market but when money is free and sloshing around all over the place, carry trades can look good.
There are plenty of difficulties with them including trading transaction taxes (0.5% right there) currency risk and direction risk. These an be hedged away but that costs. Still there is money to be had.
However as soon as the general money availability tightens, this sort of perimeter activity is the first to be closed out.
Tighter money means more cost, thinner margins and a very increased likelihood of a fall in the value of the underlying.
As such when tightening hits, income shares go out of fashion.
So what to do.
Forget it and go on a cruise and let things run their course. Its not as dumb as it sounds but I am not in the camp of those with that kind of testicular fortitude.
Have a plan B
Here is my plan B, if I was to stay in the market for income. It wont be everyone’s cup of tea but it is a solid method to try and lower the risk of being a sitting duck for bad developments.
You will miss some dividends but you will lose half the downside and gain half the upside.
Risks
The market might smash upwards and you miss that rally.
Solution decide whether its really real as it will take a lot to break this ancient sideways trend
The market might crash though the bottom trend line and you get caught
At least you missed several percent of the drop.
When you are in the selling level ease out, and likewise ease in, feeling the pulse of the market as you go. Do this with the biggest bluest dividend payers, 10-20 companies.
You’ll have to keep an eye on how its going and spend a fair amount of time sat on cash, but the alternative takes a high pain threshld and risks getting your portfolio being caught in the crash that could so easily happen.