1: 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.