MUTUAL FUND ARTICLES BY ULLI G. NIEMANN
Articles for Free publication in your Newsletter or on your
The 10 Rules for Successful Tax-Free Income
By Ulli G. Niemann
Do you sometimes question the performance of your investment
portfolio? If you are like most investors you have your
income producing assets thrown in together with your equity
portfolio. You look at the total mix of dividend paying
stocks, bonds, mutual funds and equities, and you’re
confused as to why they’re not producing enough income
or growing your portfolio value sufficiently.
I have found that part of the reason is the nearly universal
propensity of investors to ignore the long-term implications
of their income investment decisions while they focus on
Because fixed income investing simply isn’t regarded
as being as exciting as other stock market investing, it
has often been relegated to the “ho-hum” category
by writers and not as much ink has been devoted to its ins
and outs as has been expended on other types of investing.
I think that’s a disservice to those interested in
this type of investment.
Investing for income, be it taxable or tax-free, -- and,
for the record, my preference for generating tax-free income
for clients is the use of CEETBFs (Closed End Exchange Traded
Bond Funds) as described in my free e-book “How to
earn 5% - 6.5% tax-free income.” -- has some common
denominators, which I have broken down into 10 rules. These
will help you make better decisions and, at the same time,
view income oriented investments with the correct mindset,
so that you don’t constantly try to second guess yourself.
1. It’s important to consider the performance of the
Fixed Income portion of a portfolio separately from the equity
portion. Why? Because the objectives are entirely different.
Equity investments are for growth, while the primary purpose
of owning fixed income securities is to generate a secure
cash flow—either for spending or reinvesting until
it is needed. For most people, the long-term goal of an Investment
program is to generate enough income to live on, without
having to touch the principal.
To most effectively analyze and manage your investments,
keep your equity account separate from your income generating
2. All fixed income securities are “interest rate
sensitive.” Because of this their market price will
always “vary inversely” with the anticipated
direction of interest rates. Interest rates on the rise,
prices will fall. Interest rates thought to be headed south,
investment prices will move higher.
This applies to all Bond, Preferred Stock, & REIT prices.
Accept it and live with it! The variables for the movement
in price are the quality rating of the issuer, the length
of time until Maturity, or the Call Date.
Do remember that price changes in Fixed Income Securities
are not an indicator of, and have little impact on, the ability
of the issuer to pay interest. So instead of beating yourself
up when interest rates start to rise, take advantage of higher
3. Because of what they are, Fixed Income Securities are
generally held for the long term. The factor to consider
is the amount of income being received. There is no benefit
in trying to predict the future direction of interest rates,
and I strongly suggest you avoid that—along with constant
monitoring of changes in portfolio value.
Remember, fixed income investing works in a way like your
day-to-day personal finances. You pay your expenses from
your income, not from your net worth.
4. Buy only fixed income instruments where the costs are
transparent. In other words, many new issues sold by brokers
can carry hidden costs. While commissions have to be disclosed
There are often extremely large mark ups—3% or more
is not uncommon—on new issues. Buyer beware.
5. Seek out instruments with the longest duration and only
those that are Investment Grade. If you’re conservative,
you can find many closed end funds that are insured and use
no leverage, though they offer a slightly lower yield.
6. All Interest Rate Sensitive Securities follow the same
rules! This means the value of everyone’s bonds will
be going in the same direction as yours at any given time.
Don’t submit to temptation. Emotions, fear, or other
non-objective motives are not good reasons to switch from
one Fixed Income fund to another.
Focus on diversification and avoid investments with yields
that seem too good to be true. In that aspect, Fixed Income
investing and Equity investing share a couple common guidelines:
(1) if it seems too good to be true, it probably is, and,
(2) no matter how good the hype, you can’t make a silk
purse out of a sow’s ear.
7. Income production is the primary reason to purchase Fixed
Income Securities. Once you truly understand that you will
realize that the only thing you need to pay attention to
on your monthly statement is the “Income Received” number.
I suggest you ignore the others.
8. To become a successful Income investor, you must also
understand the following points and agree with them:
9. Open Ended Income Mutual Funds will not serve your objectives.
It is no secret that the fixed income variety almost never
go up. As interest rates cascaded downward over the last
several years, Open Ended Income Mutual Funds did not show
the same degree of gains enjoyed by individual securities—while
Closed End Funds did respond to these factors.
10. There are a number of reasons why it’s to your
benefit to primarily use Closed End Exchange Traded Funds:
Low acquisition costs, complete liquidity, professional fund
management and monthly predictable cash flow. Additionally,
you’re offered the opportunity to buy more when prices
fall and to realize capital gains when interest rates are
on the downturn.
Why haven’t you heard about these funds from your
financial professional before? Especially now when many are
yielding around 6% tax-free? For the simple reason that there
is no money to be made for the financial professional recommending
them. While these funds may increase your monthly income,
they won’t do a thing for the commission hungry salesman.
If you manage your portfolio, hopefully these 10 points
will assist you in more profitable investing. If you’re
unsure about putting an income portfolio together by yourself,
find a professional who works with these types of funds and
is aware of the principles I have described, and let him
or her assist you in creating the income you need to enjoy
a dignified retirement.