re: OT- Cooking the Books

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At 13.21%, your money is doubled in 7.5 years.

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If you double the number of U.S. dollars that you invested, but the purchasing power of those future dollars you get paid with is less than what it is today……will you have actually “doubled your money” in 7.5 years?

Nope. Not at all.

Even if you get lucky in the coming shitstorm and just break even on this thing, you’ll have still actually lost. Because the x-amount of US dollars you invested today can buy more than that same number of US dollars you may get back in 7.5 years will be able to buy then.

Suckers.

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But what if it would solve all your problems, and make you filthy rich?

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By the time they talk to my primary care, endocrinologist, gastroenterologist and cardiologist, I don't think he could make it affordable if he tried.

Good thing I set up a good policy before all of those cats got involved!

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How is this different than a div reinvestment with Ford Motor Company or AT&t?

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In a ROTH, stock or mutual fund dividends do nothing to cost basis. Anything above your principal is simply considered growth and taxed as income if withdrawn early. If not withdrawn early, then obviously no tax. But the principal basis is unchanged. Only ROC effects basis. It's called return of "capital" for a reason. And if you liquidate and withdraw principal from the ROTH, the principal will be reduced by the amount of capital returned.

Outside a ROTH, only stock dividends (meaning dividends paid in the form of new stock shares), ADD's to the cost basis. (Where as return of capital LOWERS your cost basis). But cash dividends do nothing because you get a 1099-DIV every year on cash dividends even if you did dividend reinvestment. (except in a traditional IRA of course)

I thought you had your 7? This basic stuff, man.

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How is this different than any other share of stock?

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Stocks and mutual funds can almost always be sold back to the company at their offering price. They are priced linearly with NAV.

CEF's share price and NAV are not linear. You typically buy them at a premium or discount to NAV. And most of all, the CEF managers don't usually offer a daily redemption program. They don't list a daily OTC offering price. You either have to find an independent buyer or hope the CEF has the capital to buy back shares at some point and at a fair offering price. Which rarely happens. They usually do a quarterly or semi-annual redemption around 10% lower than NAV.

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How is this different than holding any other asset in a Roth?

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It's not. I was simply being informative to the folks here who don't know how ROTH's work.

The CEF is just a weird vehicle - especially at distribution levels this high. I reviewed some of their docs and their distributions outpaced the return on their underlying assets pretty significantly....so they have to be selling assets (return of capital) to fund the distributions - but you say they also use new entrants $$ to fund these too?

What's the purpose behind this type of vehicle? Sounds like they're built for stable tax advantaged income streams (return of capital?) for folks that don't mind the underlying value being slowly eroded (i.e. 69 yr old retiree).

Glad I didn't run out a buy a bunch of shares!

I'm hedging my IRR with a 53' schooner in St Augustine. The dingy was worth the asking price.

Tomorrow I probably need to diversify with some of samsonseed's emerging market sovereign debt,

As far as CEF's go, Voya's NRF is actually a very good one. They have zero leverage (no capital loans/money borrowed), which is rare, and a really big deal. It means there's no ancillary internal interest rate risk.

The only problem I see with it is the fact it's NAV has consistently under-performed it's share price. And this goes back to the 85% of distribution being ROC rather than P/E margins and internal gains. It signals that the distribution that high can't last. They are inflating it to make the fund look more attractive to new buyers. Once all the shares sell, the NAV will readjust and the distribution will slowly come down and level off. How much I don't know.

Also, oil and gas are way below price norms right now too. So once the oil companies in the portfolio start making better margins, the fund will get a nice boost and will likely reduce the ROC percentage, which is good.

The purpose of these is for both growth and income. They sacrifice ease of liquidity and are susceptible to big volatility to generate high distribution rates. They are best if started in a bear market and then held for a long while. They are susceptible to high volatility and potential big losses in a bull market. And they can get obliterated if the market tanks, much more so than the normal mutual fund or the rest of the market.

Because it is an energy fund, would you say the market is decent for it right now?

Its at 50% below its 5 year high right now.

The distribution is definitely high because the energy sector is down. But it is also inflated some too. If it was strictly based on NAV it would currently be around 11% rather than 13%.

And it's true that NAV and distribution rate usually work inversely. As NAV goes up the distribution rate comes down, and visa versa. But this isn't a rule. They don't work like bonds. This is simply just a soft mandate inside the prospectus, meaning it's a goal of the fund manger to hold par from the original IPO.

But the problem with CEF's is if they can't sell all their shares or there's a sell-off, they usually start using leverage to cover distributions, and eventually that comes back to bite them if P/E can't keep up, and now they're eating through margin with interest from leveraging. And the only way to catch up is to reduce the distributions. And unfortunately, NAV comes down too because leverage equals liability.

As to cost basis on ROC, unfortunately the investor has to take the hit. The CEF gets to write off the distributions as an expense outlay even though they're mostly ROC. That's a benefit of CEF's essentially being traded LLP's and mimicking a corporation. Any expense outlay is a deduction. But instead of the investor paying tax on a capital gain, it simply gets subtracted from the cost basis. This prevents the investor from being double-taxed if they realize a capital loss.

Does that make sense?

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I'd most likely take the lazy option and go with a Targeted Retirement Fund.

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That's what a pauper would do.

Just keep sinking that hard earned cash into a Wall Street Silo and hope the fund managers leave something on the bone for you after the management fees. Maybe you can keep up with inflation.


Or hop in the pool with the big boys... and take control.

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Or hop in the pool with the big boys... and take control

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At some point, I probably will. But as someone with zero experience investing, I think the targeted fund is not a bad option. Vanguard's fees on that are almost non-existent.