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Ignore the Market Crash: Here’s When It’s Really Time to Sell a CEF

By Michael Foster

With market volatility kicking into high gear, now is the perfect time to talk about one of the biggest questions CEF investors face: how do you know when itaEURtms time to sell aA closed-end fund ( CEF ) ?

Unfortunately, thereaEURtms no simple answer to that questionaEUR"and often investors who use conventional sell signals, like a falling market price, will end up selling at the worst time.

That leads me to my cardinal rule with CEFs: itaEURtms easier to know when to buy than when to sell. If the fund is well managed, has a strong track record, is deeply discounted and has a relatively safe dividend, itaEURtms generally a screaming buy. Signs to sell arenaEURtmt always so obvious, but they are still there. You just need to know what to look for.

With that in mind, here are three key points to consider when deciding whether to sell a CEF.

No. 1: The Premium is Too High

The first clue that itaEURtms time to sell a CEF is the most obvious: when the fund is overbought, itaEURtms time to dump it.

For instance, take theA BlackRock Enhanced International Dividend Trust ( BGY ), A which I recommended to members of myA CEF Insider A service in March 2017. I chose BGY at that time because its discount had suddenly widened, despite the fact that changes in its portfolio indicated it was well positioned to surge.

The fund did this over the following eight months:

A Fast 20% Return

A big reason for this return: BGYaEURtms unusually large discount of 12% in March steadily closed to a more normal 6.7% in November, when I urged subscribers to sell.

After my sell call, the fund did this:

A Steady Drop

The lesson? Keep track of the discount, and when it gets too narrow (or becomes a premium) relative to its historic average, itaEURtms time to get out of this crowded trade.

No. 2: Pressure on an Entire Sector

Sometimes some outside force will pressure the type of assets the fund invests in. When this happens, sell as fast as possible.

The great thing about CEFs is that, in large part because of their small size and retail-investor base, they react more slowly and over a longer period to bad news than more popular ETFs. This means anyone who keeps up with the news and invests in CEFs has more leeway to respond to the market and sell.

A clear example of this happened with a municipal-bond fund in late 2017: theA Invesco PA Value Municipal Income Trust ( VPV ).

I recommended this fund toA CEF Insider A members in March 2017 for familiar reasons: a great and reliable dividend yield, strong management and an unusually big discount. And the fund delivered over the next few months, even outperforming the municipal-bond index ETF that tracks VPVaEURtms benchmark:

Cheap VPV Beats the aEURoeDumbaEUR Index Fund

Then a major news event happened in September 2017 that prompted me to release a sell alert: S&P Global Ratings downgraded PennsylvaniaaEURtms bonds, and the state did not immediately respond to the marketaEURtms concerns.

The combination of a downgradeA andA lawmakersaEURtm refusal to address it was a crystal-clear sell signal. VPV did this in the five months after we unloaded it:

VPV Takes a Fast Dive

For a municipal-bond fund, this is a big move in a short time. And all it took to avoid this short-term pain was to follow the news and react in a timely way.

No. 3: Get Defensive in a Bear Market

My third point is something that hasnaEURtmt yet happened since we launchedA CEF Insider , although I do believe it is a couple years away: a recession and bear market.

Every investor dreams of avoiding plunges like 2008/09. No one can steer clear of losses all the time, of course, but it is possible to defend your portfolio while continuing to collect the 7%+ dividend streams ourA CEF Insider A picks hand us.

The key is to keep a watchful eye for four economic warning signs: rising unemployment, slower wage growth and consumer spending and, above all, the so-called aEURoeinverted yield curve.aEUR ThataEURtms when the spread between 2-year and 10-year Treasury yields goes negative; in the past, itaEURtms correctly indicated a recession within the following 12 months.

Below the Black Line Means Danger Ahead

The financial press has spilled a lot of ink about the inverted yield curve recently, because in the last year itaEURtms tanked to its lowest point since just before the 2008/09 meltdown.

But we havenaEURtmt seen an inverted yield curve yet. When we do, itaEURtms time to emphasize defensive CEF sectors, especially if itaEURtms accompanied by rising unemployment and falling wages. The appearance of an inverted yield curve is also a very good time to prune weaker CEFs from your holdings, such as those with flaws like the ones I showed you in points 1 and 2.

Fortunately, weaEURtmre not in this situation now: incomes are rising at an accelerating pace and unemployment remains below 4%. But IaEURtmll keep a close eye on all the vital economic numbers and keep you updated (including giving you clear instructions on how to respond) inA CEF Insider.

My Top 5 Buys for 28% Returns (and 8% Dividends) in 2019

Right now IaEURtmm pounding the table on 5 CEFs trading at such ridiculous discountsaEUR"made even more ridiculous due to the selloffaEUR"that theyaEURtmre aEURoespring loadedaEUR for 20%+ gains in 2019, as these bizarre markdowns (inevitably) snap back to normal.

ThataEURtms not all, though.

Because my top 5 CEFs for 2019 also pay 8% average dividends as I write. Tack that onto our expected 20% gain and weaEURtmre looking at a 28% total return by the end of 2019!

Now with the way the markets have been behaving lately, I know what youaEURtmre going to say next: aEURoeMichael, what happens to these 5 funds if the market tanks in 2019?aEUR

ThataEURtms the best part.

Unbeatable Nest Egg Protection

You see, my top 5 fundsaEURtm huge discounts also let us sleep well at night. Because if the market falls on its face next yearaEUR"which, as I just mentioned, is the opposite of what I expectaEUR" these funds are already dirt-cheap , so theyaEURtmll have plenty of built-in downside protection aEUR

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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