Building Portfolios With Closed-End Funds

For many investors, closed-end funds don't simply provide attractive, regular cash flow, total return potential and investing convenience. Thanks to the variety of different fund types available, they also afford the opportunity to build a diversified, income-oriented portfolio, one composed of numerous closed-end funds representing various strategies and asset classes.

Diversifying Cash Flow with Closed-End Funds

It's that assortment of strategies and asset classes that makes it possible to create a portfolio of closed-end funds with the potential to provide the income stream you want with the risk profile and investment characteristics you need. Here's why:

Every investor knows that different types of securities perform differently in a given market environment. When stocks are surging, bonds may stay flat or underperform. Likewise, when stocks lag or fall, many investors flock to bonds. A portfolio containing all stocks or all bonds exposes you to all the risks that an asset class carries in a certain market. But the right mix of two or more asset types can help smooth the ups and downs while giving you the combination of growth and income potential that's right for you.

Funds oriented more toward fixed-income securities will tend to exhibit more of the characteristics and risks of bonds. Funds oriented more toward capital appreciation add exposure to the characteristics and risks of equities. And some funds use additional securities, like preferred stocks, and investment techniques like leverage, that add other dimensions of risk and reward.

When building a portfolio with closed-end funds, then, it's important to understand the potential risks and rewards of each fund, and weight them accordingly in the portfolio. By diversifying your source of income – and diversifying your risk – you can achieve a well-balanced portfolio that helps you meet both your investment goals and your risk tolerance.