Selling on fear is a habit that’s so easy to fall into (especially now!). But giving in to it could cost you a lot: as much as $2,300 on every $10K invested.
And if you’re investing for income (as we are!), you face a double hit.
Not only do investors almost always get the timing wrong, but they cut off their income stream, too! When you’re holding our favorite income plays, closed-end funds (CEFs) yielding 8%+, it’s especially damaging.
I mention this now because I was reading a recent report from Morningstar that put the potential damage from this mistake into dollars and cents.
This chart shows that, over the last decade, investors’ return was 1.2 percentage points lower per year than the average return of US mutual funds and ETFs (you can see that gap captured in red on the right).
It means the average US investor missed out on $2,300 per every $10,000 invested. And bear in mind that the average S&P 500 index fund yields just 1.1%! Factor in the typical 8%+ payout on a CEF, and the potentially missed returns would run higher.
Why are these folks missing out? Quite simply, they’re trading too much. And while the study doesn’t say this is due to fear, at worrying times, trading volumes tick up. You don’t have to dig too deep to see that.
I bring this up now because last week’s selloff rattled some investors, especially with the general sense out there that the stock market is overpriced.
To be sure, stocks are vulnerable to short-term selloffs these days. But in the longer term, stocks—and stock-focused CEFs—have lots of room to gain. That means investors who sell in response to bubble fears will likely regret it.
As Long as Consumers Spend (and They Are!) Stocks Benefit
Despite negative feelings about the economy (and the fact that, yes, a larger slice of consumer spending is being driven by the wealthiest among us), the numbers tell a positive story when it comes to stocks (and those stock-focused CEFs).
Let’s start with the amount of money Americans have been spending to service their debts, which has dropped over the last 20 years:
To be sure, spending on debt has rebounded from its pandemic low, but that’s due to moratoriums on various kinds of debt then, so we can ignore that. Otherwise, US households have less than 12% of their income going to debt, a healthy ratio and lower than Australia (17.5%), Canada (14.4%), or even wealthy Norway (21.1%).
Stock Gains Are Backed By Rising Profits
Where does this leave US companies? With stocks posting one of their best three-year runs of all time (an 80% gain), it’s natural to ask if this bull market has run its course.
As always in investing, we have to put that gain in context and remember that it follows a deep selloff in 2022. So with that in mind, this gain isn’t surprising. We also need to remember that share prices inevitably track profit growth. Where are we on that front?
The chart above (from the Financial Times) shows that US companies are posting some of their strongest-ever profit gains. What’s more, profit growth has been accelerating for three years, and all indicators suggest this will continue.
Bubble Fears Have Put One of Our Favorite 9% Payers on Sale
With stocks up but set to go higher, we want to buy—but we want to do so at a discount. And CEFs, give us one of the few avenues available for us to do just that.
Consider the Liberty All-Star Growth Fund (ASG), which has been a cornerstone holding of our CEF Insider service since May 2023. It’s returned a little over 10%, on an annualized basis, in that time.
Moreover, the fund’s high yield (an 8.9% payout that’s tied to ASG’s underlying portfolio value) means nearly all of that return has come in the form of dividends.
Yet despite that sterling income (and gain) history, ASG trades at a 9.9% discount to NAV. This means we can buy its portfolio for 90 cents on the dollar. That’s a sweet deal when you consider that ASG holds the likes of NVIDIA (NVDA), Microsoft (MSFT) and Amazon.com (AMZN).
Source: All-Star Funds
So why is this deal available? For the simple reason that CEF investors, conservative sorts they are, have been hesitant to jump into this market. That’s creating many unusually large discounts on CEFs, including ASG.
Ignore the Naysayers: It’s Time to BUY AI Stocks (Start With These 8.2% Payers)
As I just said, ASG is far from the only CEF on sale as conservative investors read too many over-torqued headlines and stay out of the market.
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