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Understanding and Buying Closed-End Funds

The array of financial products facing an investor is mind numbing and include stocks, bonds, mutual funds, exchange-traded funds, closed-end funds, annuities and the list goes on and on.

Market trendsIn this article, we hope to shed some light on closed-end funds, an often overlooked segment of the market. Closed-end funds have properties of both mutual funds and exchange-traded funds but are also unique in a number of ways. Like mutual funds, closed-end funds, or CEFs, are managed pools of assets such as a collection of stocks or bonds. And like exchange-traded funds, CEFs trade on an exchange like a stock does. However, in a CEF, the capital base is fixed and new shares are not created or destroyed when an investor buys or sells into the fund. The benefit of a closed-end fund is that you have a diversified, professionally managed investment pool where the manager is free to focus on investing without having to worry about redemptions from the fund. Not worrying about redemptions is particularly important when investing in illiquid securities like bonds. Below we will touch base on a few key aspects of CEFs that every investor should investigate and be aware of before making a purchase decision.

Closed-End Funds Premiums and Discounts

Because CEFs trade on the exchange, it will have a market price where buyers and sellers can exchange shares. In addition, the underlying assets in the fund have a value, leading to a net asset value or NAV for the fund. These two numbers are rarely the same. When a share price is less than the NAV, the fund is said to be selling at a discount while it is at a premium when the share price is greater than the NAV. A CEF trading at a discount can be a good deal because you can buy a pool of assets worth, for example, $1 for only $0.85. The truth is, there are many reasons why a CEF could trade at a discount. For example, if it has a poor management team or the NAV is based on stale prices. Likewise some CEFs consistently trade at premiums to their NAV. One does need to be careful when buying CEFs that trade a premium because it is likely that the premium will eventually collapse. Likewise, management of a CEF that is trading at a consistent and deep discount faces a proxy battle and it is a potential take-over candidate because, in theory, the assets could be liquidated and investors could be compensated at the higher NAV.

CEF Distributions

Many investors prefer dividend-paying investments as they can earn a steady stream of income. Closed-end funds cater to this type of investor because most offer attractive payouts. In addition to a dividend, it is important to note that some CEFs payouts consist of a return of capital. What this means is that the capital base of the CEF is shrinking when a CEF makes a return of capital, which can be okay in certain situations but it can also be an area of concern. The total distribution rate from a CEF can be calculated in comparison to the fund’s NAV. However, it can also be compared to the fund’s share price. If a fund is selling at a discount, the distribution yield becomes more attractive.

CEF Leverage

CEFs often employ leverage to boost distribution. Investors need to remember that this leverage magnifies returns, both on the upside and on the downside. It can also magnify duration and other common investing risk factors. Typically, a CEF obtains leverage through issuing debt or preferred shares but it may also obtain leverage through the use of derivative securities or tender option bonds.

CEF Initial Public Offering

Like a stock, closed-end funds have an initial public offering (IPO) through which they raise capital and distribute shares. It is usually not advised to buy a CEF during the IPO. The reason for this is that the CEF will typically sell at a premium to net asset value when first launched. Those that underwrite the IPO, that is, distribute it to the investing public, earn what is called underwriting fees. In addition to the underwriting fees, CEFs typically offer a selling commission to the brokers that sell them to the public. These fees drive a wedge between the NAV and offering price, creating an initial premium that can quickly collapse after the IPO, thus leaving investors with a loss. We suggest investors wait and buy closed-end funds in the secondary market to avoid this initial premium bump and the added potential loss.

Option Investing, Calls and Puts

If the stock market is not exciting enough for you or you want to earn a big payoff from a small investment, you might want to consider option investing. As the name implies, options grant the owner the option to buy or sell a specific stock. When you own a stock, the value of your stock moves up or down one for one with the stock’s price. That is not the case with options because a small move in the stock’s price can cause a much larger move in the price of the option. In other words, options are a leveraged bet on a stock’s movement.

Understanding Calls and Puts When Investing in Options

There are two primary types of options: a call and a put. A call is a bet that the underlying stock will go up in price while a put is when you bet that the stock price will fall. To find out more about calls and puts go here. The price of an option is called the premium. This is the amount you are required to pay just to enter the options agreement. For every buyer of a call, there is someone selling that call. Therefore, the buyer has the opposite view than the seller. In this way the options market is a zero-sum game because there is a loser for every winner. The buyer of an option pays the premium while the seller of the call earns the premium.


Unlike a stock, options expire. Each option comes with an expiration date, after which your option will expire either in-the-money or out-of-the-money. Options typically begin trading several months out but become more heavily traded as expiration approaches. If your option expires out-of-the-money, then you have lost the entire premium that you paid to buy the option and that money isn’t coming back. If the option expires in-the-money, congratulations. The more time until the option expires, the more valuable it is. As expiration approaches, the option value quickly falls.

Option Volatility 

option investing volatilityOptions prices depend on volatility. Volatility is the amount by which a stock can be expected to move up or down over a length of time. The bigger the swings, the more likely it is that the option will expire in or out of the money. You will notice that options on volatile stocks are more expensive than options on boring, less volatile stocks. The relationship between options and volatility helps determine the VIX which is an index of market volatility. Information about the VIX  and the VIX term structure can be found here.  Investing in options is all about volatility and is not for weak of heart.

Option Investing Strategies

Options can be used in combination. Various strategies can be designed using call and put options with different strike prices and times to maturity. The strategies have various names such as butterfly, collar and strangle. One popular approach to investing goes by the name ‘covered call’. In a covered call, the investor owns a stock and sells or writes call options on the stock. This allows the investor to earn some income from selling the calls in exchange for giving up some of the upside in the underlying stock.

A Losers Game

Are you considering options for your investment portfolio? Investors need to be careful trading and investing in options. This is true for several reasons. When buying a stock, an investor pays a commission to the broker and half of the bid-ask spread on the option.  For options, both of these costs are much larger. Many traders of options are sophisticated traders such as hedge funds. It is difficult to outsmart these traders at their own game. Options are difficult to value. Stocks with a wide following usually have heavy trading volume and therefore an agreed upon price. Options typically have much less trading volume, leaving their value much more uncertain. Pricing options typically takes sophisticated computer programs. Options are short-term investments and need to be monitored closely. Other types of options, such as Binary Options, are often loosely regulated. You can find more information on Binary options here.

In Summary

Remember, Option investing is not for the weak of heart. It is important to remember that while option investing is a way for an investor to place a leveraged bet on a stock, this type of investing can be very risky, to say the least. It is best not to invest the house or your retirement funds in options as the moves can be quick and painful. Call options are worth more when a stock goes up, while put options benefit from a stock price decline. You must be very careful when trading options and do not risk what you can not afford to loose, as the odds are stacked against you.

The Top 5 Dividend ETFs

investment moneyDividend-paying stocks have outperformed non-payers over the long haul. That is just one of the reasons why investors seem to prefer dividend paying stocks. Another reason we all have is the need for income. Dividend stocks seem to offer the best of both worlds—the upside potential of stock growth along with the steady stream of income like a bond. Unlike a bond however, companies have no contractual obligation to pay dividends. In fact, those stocks with the highest dividend yields are often the riskiest and likely facing a dividend cut or moribund growth prospects.

Always be aware of your need for diversification and remember that the risk of picking individual dividend paying stocks is very high. For income growth and asset protection investors should consider a dividend-themed ETF. There are a large number of dividend ETFs to choose from and this article highlights five of the best as we head into the summer of 2016. Each of these funds come with the low expense ratio that you would expect from an ETF and each use some sort of screen to separate the wheat from the chaff among dividend paying stocks.

Vanguard Dividend Appreciation ETF VIG

This popular Vanguard ETF VIG fund selects stocks that have increased their dividend for at least ten consecutive years. Stocks that are able to consistently raise dividends typically have strong brands, efficient scale or a monopolistic market position, such as Coca-Cola, CVS or Medtronic, each of which are top ten holdings in this fund. At $20 billion in assets the fund is perhaps too large. Small size is important for equity funds so that they are not forced to own too large a position in any one individual stock. However, the fund market cap weights its holdings, so that smaller stocks make up only a smaller portion of the fund.

This ETF charges just 0.10%, that is $10 for every $10,000 invested and yields 2.2%. That is a lower yield than the other ETFs on this list, but the hope with these companies is that the dividends will grow, as they have over the past ten years. Information on the Vanguard ETF VIG fund can be found here.

Schwab U.S. Dividend Equity ETF SCHD

The Schwab ETF SCHD fund starts with the largest 2,500 U.S. stocks and eliminates the half with the lowest yield. The remaining stocks are ranked based on dividend yield, cash flow to debt, dividend per share growth and return on equity. The ETF selects the top 100 stocks based on these four metrics. The result is a high yielding portfolio that does not skimp on quality because quality companies typically have good dividend growth, a high return on equity and low debt. At only .07%, this is the cheapest ETF on this list. It currently yields 2.9%. Get more information on Charles Schwab ETFs here.

iShares High Dividend ETF HDV

iShares High Dividend ETF is somewhat of a misnomer, because it is not seeking out the highest yielding stocks per se. Instead, it seeks out companies that are rated as having a “moat”, a qualitative assessment of a firm’s competitive economic advantage, and have a low risk of default, a quantitative measure of a firm’s debt and volatility. Stocks that meet these two criteria are ranked by dividend yield and the top 75 stocks are included in the ETF. The fund charges just 0.12% and recently had a yield of 3.6%. More information on the iShares HDV fund can be found here.

Vanguard High Dividend Yield ETF VYM

Yes, Vanguard has two ETF funds on this list. Whereas VIG tilts to quality and growth, VYM tilts toward higher yielding, value stocks. It sorts all dividend paying stocks by yield and selects the top half. This may sound like a risky approach, given that higher yielding stocks are typically riskier. However, the ETF market cap weights its holdings, so large cap dividend payers make up the majority of assets, as opposed to higher yielding mid and small cap companies. The fund recently had 427 stocks, much more than the 185 stocks in VIG. This diversification is important because the ETF does not screen for quality. The ETF charges just 0.09% and recently had a yield of 3.1%. Check Vanguard’s ETF VYM fund here.

WisdomTree Total Dividend ETF DTD

WisdomTree takes an elegant approach to dividends. It weights all U.S. stocks by the dollar amount of dividends paid. This results in a skew to large-cap value companies. Large companies pay the largest dividends in terms of total dollars and value companies tend to pay more than growth companies, which retain more earnings to invest for future growth. What is interesting about this approach compared to SCHD or HDV, is that it does not set an arbitrary limit on the number of stocks it owns or an arbitrary number of years that a company must have paid a dividend, like VIG does.

What Wisdom Tree does Instead is to include all companies to the extent that they pay a dividend and weights them in proportion to dividends paid. It is important to understand that this ETF weights by total dollars paid and not by yield. If it weighted by yield, riskier companies might rise to the top. At 0.28%, this is the most expensive ETF on this list and it recently had a yield of 2.8%. Information on the WisdomTree Total Dividend ETF DTD can be found here.

The Top Five Dividend ETFs Conclusion

If you going to buy stocks or ETFs you need to look at the added benefit of yearly dividend growth. For most investors, dividends and growth is the right decision for a long term investment strategy. Yearly dividends and long term growth potential make looking at these top five dividend ETFs a strategic move.

Investment Diversification and why it Matters


Investment Diversification is a powerful tool in financial markets. It can help you reduce risk without significantly diminishing returns. For proof, let’s look at the long-term returns of the two main asset classes, U.S. stocks and bonds. For U.S. stocks, we will use the S&P 500 while for bonds, we will use intermediate-term U.S. Treasury Bonds. By intermediate, I mean those with a maturity of about five years. Information about U.S. Treasury Bonds can be found here.

A Brief History of Financial Markets

In the 47 years from 1968 through 2015, the S&P 500 returned 9.8% on an annualized basis. This compares to 7.2% for bonds. At first glance, it may seem like a good idea to put all of your money into stocks. To see why this might be a mistake, we must first have an understanding of risk. That 9.8% return for stocks came with tremendous volatility, such as a negative 37% return in 2008. In fact, stocks lost more than 5% in 8 out of 47 years. That only happened once for bonds. Another way to measure risk is with standard deviation. Stocks had a standard deviation of 17%, more than twice that of bonds. So while bonds had a lower return than stocks, they were indeed less risky.

Here is where investment diversification comes into play. Stocks and bonds don’t typically move in the same direction. In fact, in 2008—the year that stocks lost 37%–bonds gained 13%. We call this correlation and stocks and bonds are nearly uncorrelated. In other words, when stocks zig, bonds zag.

Combining Stocks and Bonds  

Investment Diversification

Investment Diversification

Now, if we combine stocks and bonds into a portfolio, we might get returns similar to the all-stock portfolio but with less risk. Indeed that is what we find. A portfolio of 80% stocks and 20% bonds had a return of 9.6% but a standard deviation of 14%. That gets us 98% of the return of the all-stock portfolio but only 80% of the risk.

If we want to cut risk even further, we can build a 60/40 portfolio with 60% of the assets in stocks and the remainder in bonds. This portfolio yields 93% of the return of the all-stock portfolio with only 63% of the risk. In addition, this portfolio fell only 17% in 2008, much better than the 37% loss of the all-stock portfolio.

Build It For Me  

A 60/40 portfolio has long been an investing rule of thumb. Those who think this is an appropriate mix might consider buying Vanguard Balanced Index Fund symbol VBIAX. This fund maintains a 60/40 mix by re-balancing between two indexes, one representing all U.S. stocks and the other covering nearly the entire U.S. bond market. By owning this fund you will automatically have a solid investment diversification in place.

A more dynamic rule of thumb suggests putting an amount into bonds equal to your age. This way, a young invest will have most of his money in stocks, but this will gradually shift to less risky bonds as the investor approaches retirement. This shift is called the glide path. Investors looking for one fund to manage their glide path over time might consider a target-date fund like Vanguard, T. Rowe Price or others offer. Check Vanguard’s target date fund here.

Don’t forget to check out our articles on The Top 5 Dividend ETFs and Closed-End Funds.

Stock Investing and How Do Brokers Help

Stock Investing Help

Although stock investing can be a great way to add to your wealth, it can be a confusing and intimidating endeavor. This is why most investors chose to employ a broker to help manage their finances and investments. Though some decide to tackle investing on their own, a broker can offer many services most would be unable to achieve alone. Selling and buying stock on your behalf is one job a stock broker has, but a great stock broker will do so much more.

stock investing help

If you are new to investing, there is one disadvantage that could make or break your investing career: experience. While reading all the information, learning about companies, and talking to other investors is a great way to begin, there can be leverage in having real world experience in the stock market game. Brokers are experienced in several different types of investing, which makes them like the encyclopedia of investment. We also recommend talking to more than one broker and trading firm. You will find more suggestions and investing ideas as you talk to more and more investors.

Keeping your broker’s experience in mind, he or she can be a great tool in helping advise which stock purchases you make. There may be new investments you hadn’t considered, and it would be your broker’s job to make those known to you. Additionally, he or she could help you decide what times are best to buy and sell your stock, taking into account trends and direction the stock market is headed.

As time passes and you dive deeper into investments, your portfolio will – or should – start to really diversify. This is a good thing, but can also become hard to manage the larger it grows. Brokers are great for managing your portfolio, keeping track of how much you are making from each investment, what needs to increase, what needs to decrease, and so much more.

Depending on the relationship you have with your broker, you may also learn your own way around investing. By asking questions, keeping an open mind, and paying close attention to the work your broker does, you will start to gain confidence and be able to make more of your own decisions. Eventually, you may be able to depend less on your broker and gain control over your own assets. As a word of advice here, even though you may one day feel you know which way the market is going to move, take your time and be very afraid of option investing until you are really good at all this. The biggest danger you have in investing is believing you know what is going to happen or believe 100% what someone tells you.  Go slow and remember stock investing is not a game and never risk what you can not afford to lose.

What is a Bear Market, and How does it Affect Investments

What is a bear market? While there is no one definition of a bear market, in short, it is when the stock market falls for a significant amount of time. Though the amount of the decrease can widely vary, bear market is usually defined as a drop of 20% or more. To be considered a true bear market, this fall must last for a few months at least, as opposed to a correction which is a short-term decrease. Bear markets can be caused by a variety of things. The economy can play a huge factor in a drop in the stock market.

A bear market can really throw a kink into short term investor’s plans. The best way to make money with investments are to “buy low and sell high”. At the beginning of a bear market, many may buy stock in hopes the market will correct itself and cause quite a gain in money. If the market stays down, however, there is no money to be made. Stagnant money – especially at low rates – does nothing positive for a portfolio. The expectation that money can be made with a sell can drag out for months, giving false hope to the investor.

If you are a long term investor, however, things may look good. If you have no intention of selling anytime soon, buying stock with appropriate companies at such low prices can really pay off in the long run, when the market gets back to normal.

You may be tempted to think the trend will last forever, and sell what stock you have in attempts to keep your dignity. This isn’t always the best idea. Selling stocks for less than you bought them can cause a significant loss. The best thing to do in this situation is to put your money with safe companies that you know will eventually rise up. It is important to look at the business itself and not their stocks at one point in time. If you decide to buy safe stocks at such a low price, holding on to them until the market gets back on its feet can really help you in the long-run.

What is a Bull Market, and How does it Affect Investments

A bull market doesn’t have any one specific definition, but the general idea is a significant increase of the stock market of an extended amount of time. Stocks can fluctuate often, as is the nature of the stock market, but to be considered a bull market, it is generally accepted that 80% of all stocks rise considerably – at least 15-20%. You may wonder what would cause such a variation, and the answer is usually the economy. A better economy causes lower unemployment, higher spending, and companies almost always do better, which increase stocks. Other factors definitely are considered, but economy seems to have the largest influence.

What does a bull market mean for the investors? If you can time it right, there is great money to be made in a bull market. By buying stocks before they rise too high and selling as they reach their peak, a lot of return can be expected. However, this is easier said than done.  The stock market is unpredictable at best, and can be near impossible to anticipate.

There are things to look out for when trying to map out the correct times to buy and sell your stocks during a bull rise. Watch for “dips” in the surge of prices. This can be a great time to buy shares, if you were unable to catch the rise in the beginning. Of course, there is always the chance that “dip” turns out to be the beginning of the inevitable downfall, so it can take a trained eye or good luck to catch it at just the right time.

Another thing to consider is that most investors, especially experienced ones, will fight for a good trade or sell in this market. Some hold on to their shares for dear life, some are a little more liberal with their trades, but you can be sure the market will be active in this time period.

All in all, the bull market can be a great time to make a substantial amount of money, if you are willing to take the risk. Do your research, consult your broker if you have one, and make informed decisions, and you may be lucky enough to thicken your investment earnings and portfolio.

Why are Gold, Silver and Precious Metals Important

To an everyday citizen, investing in gold, silver, and precious metals may seem like a frivolous, primitive, or even pointless investment. A trained and experienced investor, however, knows these investments may very well be some of the most important and best ways to earn money. Metals aren’t just made for jewelry; they are a stable investment tool.

If you think about it, before there was paper money, gold, silver, and precious metals were used as barter tools. They have withstood the test of time. Five or ten years down the road, we can’t be sure that our paper dollar will be worth anything, but it is a sure bet that a gold bar will be.  Experts agree that the value of paper money is going downhill.

Another benefit to metal investment is that rather than the “idea” of holding money, and having your records on paper, you have physical assets that you can see, touch, and hold. This can put one’s mind at ease with all the uncertainty surrounding technology. While physically holding large amounts of metals may seem like a hassle, there are depositories and bank safety deposits available to help keep your money safe.

Unlike stocks and bonds, metals are traded through people, mostly. They can be sold at pawn shops, coin shops, or any location that buys and sells precious metals. But be weary of schemes and anything that seems too good to be true. Buying from and selling to reputable sources is the most important asset to gold, silver, and metal investment.

Just like any other investment, it is still important to watch for trends, rises, and falls in the market of precious metals. Though it can be hard to predict, buying metal before a spike in value, and selling before a fall can really net some income. There are a number of people, however, who have decided to hide and hold their precious metals, in the possible event of an economic downfall. Having the security of metal that would (or should) always have some sort of value can be quite appealing to most.

5 Biggest Mistakes Made by New Inverstors

The stock market, bond market, and other investment tools are a great way to earn money, and have it work for you. As a beginner, however, there are a few things to watch out for, mistakes that are most made by new investors.

Depending on others to make your decisions.

It can be tempting to be a follower, but the best advice you can take with investments is to do your research. Following trends may seem like the easier route, but just because others think it’s the best idea, doesn’t make it the best idea. Research companies, study trends: past and present. The best decision is an informed one. Also stay away from advice about option trading until you really understand what you are getting into and what the risks really are.

Investing money meant for every day funds.

It is so very important to make sure you have your budget accounted for. Relying on investment funds to pay your mortgage is the quickest way to lose your home. You should be able to pay all your bills, plus have emergency money set aside. Any money left over should be what you invest. Be prepared to lose every penny, it’s better safe than sorry!

Not having a plan.

After you’ve decided to become an investor, but before you make that first purchase, it is in your best interest to have a plan laid out. There are several different styles of trading: from day trading to trend following. Decide which is best for your lifestyle, and stick to that plan.

Not selling at the right time.

When looking through rose colored glasses, one may think that a rise in the market may continue long past it’s due. The best time to sell is at the top of a peak, but wait even just a few minutes too late, and you could be looking at a sharp decline. Hold on while the stock is steadily rising, but remember to let go before it heads its way back down.

Not knowing when to cut your losses.

You may think that down slope will soon turn back around and start climbing again, but be careful not to catch yourself in a bear market, and stuck with steadily declining stock. The best choice may be to sell before you lose even more.