The Protected Principal Retirement Strategy Portfolio

Includes: TA
by: Real-Time Retired Guy

A lot has changed since 2012 - 2013.

I have learned a lot about portfolio construction.

Regardless of the market ups and downs, our portfolio dividends continue to support us.

This article provides an update on the Protected Principal Retirement Strategy portfolio, addresses its composition, and discusses re-allocation of assets.

Turn Back The Clock

Since they say "hindsight is always 20 - 20", let's take a trip back to 2012 to when I first developed the Protected Principal Retirement Strategy portfolio. For the sake of brevity, going forward I am going to refer to the portfolio as "PPRP". In this article I will revisit September 2012 - the month that I formulated the first Protected Principal Retirement portfolio. I will review how I assembled it; highlight the lessons learned (lots of them) and how my allocation strategy evolved; look ahead to end of 2019 re-balancing; discuss the asset classes comprising the current portfolio; and lastly, discuss some potential portfolio candidates that are on my watch list.

PPRP 2012 Revista

In October 2012 I authored an article for SA entitled: "Protected Principal Retirement Strategy: Retiring Without A Million-Dollar Nest Egg - Part XII: Putting It All Together".

The intent of my strategy has always been to generate dividends that will bridge the gap between our retirement income and the funds we need to live a comfortable, but not extravagant life. My focus is to help folks that are nearing, or already in retirement whom do not possess a million dollars or more in their retirement nest egg. Hence, I labelled this group the "mid-rangers".

Based upon the funds needed to fill this income gap, a personal risk tolerance will result, which can be translated into the percentage yield necessary to generate the dividend income that will be required. In my case, it was just under eight percent.

My original 2012 PPRP had the following asset allocations:

  • MLP's - 40 percent (10 percent upstream, 20 percent midstream, and 10 percent downstream)
  • Royalty Trusts - 15 percent (perpetual life trusts)
  • Equity REITs - 10 percent
  • Mortgage REITs - 5 percent
  • Business Development Companies (BDC's) - 10 percent
  • Foreign Stocks - 15 percent
  • Currencies and Other - 5 percent

The yield received from this portfolio allocation exceeded eight percent.

Lessons Learned/Changes Made

In the latter part of 2012 the energy sector offered what I considered a good opportunity for a decent total return (12 - 15 percent annually), so I over-allocated holdings in this asset class. As we got closer to 2015 and 2016 energy holdings hit a bump. Exploration and production MLP's were hit hard, forcing some to fold their tents. Royalty trusts in particular seemed to explode in number, and fluctuations in oil and natural gas prices resulted in a few wild swings in quarterly dividend declarations. Eventually, many of the limited-life trusts tanked due to excessive dividend policies.

REIT's performed pretty much as expected, with exception of the mortgage REITs. This group seemed to overextend their dividend paying abilities, resulting in payouts being reduced (substantially in some cases).

With few exceptions, the BDC's performed well - those whom over-extended themselves paying dividends suffered when net investment income failed to exceed dividend levels.

Foreign investments favored energy, shipping and emerging market income funds. These performed okay, with a few exceptions in the drilling sector.

So, what did I learn from the first few years living with this portfolio? I want to share this with all since I made a few mistakes which have been corrected (so far), and I hope that I will not re-live them anytime in the future.

My first lesson was regardless of how good a sector appears at the time, it is a mistake to be over-allocated for too long a time. Sectors can go out of favor quickly, and one can be left in the cold before wising up enough to trim back holdings.

Secondly, I learned to not be tempted by outsize dividends and distributions, no matter how good they look. I have always espoused the potential downsides associated with "yield chasing". When I purchased certain royalty trusts they automatically came with high yields, so when I bought them they were part of the package - and later became part of the baggage. The same can be said for Seadrill, which I was convinced was going to be a wonderful investment. This might be my biggest regret of all energy purchases I have ever made, since overnight they slashed the dividend and tanked the stock price in no time flat. By the time I was able to get out I had lost almost 50 percent of my investment.

A third valuable lesson I learned (and this might be just me) is that I need to keep a cash cushion so that I will have dry powder should the markets correct (or worse).

Next (there are a bunch of lessons it seems) is diversification. While investing in MLP's, BDC's, REITs, foreign stocks etc. I tended to not pay enough attention to diversification. It dawned on me (call me a slow learner) after about a year that I could diversify within individual asset classes. For instance, within the MLP sector there is more than just upstream, midstream and downstream ones. There are also MLPs that deal with renewable energy sources, real property interests and infrastructure, recreation, refining and logistics, storage and terminalling etc. BDC's include a range of venture capital firms engaged in different types of loans. REITs of course can own many types of land uses, and foreign companies run the same gamut as those here at home, plus emerging markets.

Still another valuable lesson is that I need to review the portfolio quarterly instead of annually or semi-annually, re-allocating as necessary to prevent learning the hard lessons the hard way.

Finally, (enough for now) is that I committed to researching/studying closed-end funds (CEF's) - always liked them better than mutual funds due to the ability to buy at a discount to net asset value from time to time. By paying close attention to their stated investment purpose, and carefully reviewing their portfolio holdings I found that I could use them to diversify the PPRP even more. More to come on CEF's, to which I devote my next article.

When all is said and done, over the past six years I have been successful in generating enough dividend income to fund our income gap without dipping into principal even once.

The Markets - Looking Ahead

Much is being written and said about the direction of the stock markets going forward. Not a day goes by that some CNBC or Marketwatch guru doesn't give an interview or publish a treatise on where they think the markets are headed. Same goes for the articles here on SA. Can't peruse them any morning without seeing "markets going up!" or "market crash imminent".

With regard to the PPRP, I have to look at long term trends since I am invested long-term. While a short-term move can make me hiccup, I try my best to ignore these moves and focus a few years out.

I try to follow a few basic principles when viewing the markets:

  • The markets go up and they go down. Fortunately, on an historic basis whenever they have gone down they eventually reverse and go up. I wouldn't extrapolate this trend too far into the future as someday they might not rebound.
  • NO ONE can time the markets - it is a recipe for losses. For some reason, every time I mention I am raising cash someone will accuse me of trying to time the markets. I have no problem missing 10 or 15 percent of a bull market so long as when I buy I am certain that the uptrend is in place.
  • I never short a stock - unlimited downside, plus you have to give up dividends - that runs contrary to my investment strategy.
  • I do not put much faith in technical analysis (TA). I do however follow long-term trend lines and have some faith in gap analysis (the concept that all gaps will eventually be filled). Gap analysis sometimes helps me to identify prices at which to buy and/or sell a stock. That's as far as I go with TA.
  • Since I sometime write covered call options on positions I try to identify market and stock trends favorable to this discipline.
  • Lastly, if the markets appear to good (or too bad) to be true - they probably are.

All of this brings me to the place where I will share my market outlook for the next year or so (this might be the most comedic part of the article). I believe that we are long overdue for a correction, and possibly a bear market. As far as I am concerned, last December's lows I think happened over too brief a period to be considered a bear market. I believe that most markets act in a rational fashion - there are bull markets and there are bear markets. I do not think today's markets display much in the way of rationality. My reason for saying this is that our country has a leader whom seems to predicate his success on being able to prop up the markets - using any methods he can. I will disclose that I am apolitical - I do not like the way either of our political parties act. That said, I will stay clear of political comments unless they have relevance to my discussion.

I think that over the next year we will see a correction that is steeper than most gurus are postulating. How steep - I have no idea, but I want to be prepared. For that reason, I have been raising cash for some time. I have gone from holding 26 stocks and funds to my present position where I now hold only 20. In really good times, I will increase to around 30 or so, but that's about all I can manage to follow at my age. My 20 holdings amount to about 75 percent of my funds being invested at the present time. I don't really think I would ever go over 30 percent cash, since the tax consequences associated with selling long-term MLP holdings could be prohibitive. Plus, I have several stocks and funds that I consider core positions that I wish to hold.

Current Holdings and 2020 Re-Balancing

The PPRP currently consists of 20 stocks and funds. Here is a brief summary:

  • ACP - Closed-End Fund - Senior Loans
  • CEN - Closed-End Fund - Investment Grade MLP's
  • DKL - MLP - Refined Products/Logistics
  • DPG - Closed-End Fund - Global Utilities/Infrastructure
  • EPD - MLP - Midstream Gas/Oil Pipelines etc.
  • ET - MLP - Midstream Gas/Oil Pipelines etc.
  • ETJ - Closed-End Fund - Large Cap w/COvered Call Writing
  • EVA - MLP - Wood Pellets
  • FGB - Closed-End Fund - BDC's
  • HIE - Closed-End Fund - Income/Energy/Utilities/Telecom
  • LMRK - MLP - Real Property/Infrastructure
  • NRO - Closed-End Fund - REITs
  • NRZ - Mortgage REIT
  • PBFX - MLP - Transportation/Terminalling/Storage
  • RA - Closed-End Fund - Real Infrastructure Assets/Bonds
  • USAC - MLP - Compression Services
  • USDP - MLP - Rail Terminalling/Storage
  • UTF - Closed-End Fund - Global Infrastructure/Utilities
  • ZF - Closed-End Fund - Infrastructure Equities/Bonds

You can see from the list that I have nine MLP's. This is down from 15 a few years ago. BDC's and REITs (except for NRZ) are accounted for by CEF's. If fact, CEF's are half of my portfolio holdings.

All of these are long term and/or very long term holdings. I am considering swapping one or two for something on my watch list as I am concerned that if we indeed enter a recession, those funds possessing higher yields and holding non-investment grade bonds are going to get hit hard.

Prior to 2017 I re-balanced annually. Since 2017 I have stepped it up to semi-annually. Now, that my thinking is a correction is coming, I will probably go to a quarterly re-balancing, at least until a correction (or bear market) is over.

When I re-balance for 2020 (which I am thinking about now), I will probably increase BDC and REIT holdings. I have decided to not purchase individual MLP's; however, I like most of the investment grade holdings of CEN and might increase MLP holding using this CEF. As I work through this process I will provide information relative to the percentage allocations among asset classes, and, if appropriate within individual asset classes.

Watch List

I have a relatively small watch list, as I am still in the process of evaluating and researching future positions. In case anyone is interested, here is the watch list (all but two are CEF's):

  • ACV - Closed-End Fund - Convertibles, Equity and Debt
  • EMD - Closed-End Fund - Emerging Markets Debt
  • FAM - Closed-End Fund - Global Debt
  • FCO - Closed-End Fund - Global Income
  • FSK - FS KKR Capital (a BDC)
  • HPS - Closed-End Fund - Preferred Stock
  • IGR - Closed-End Fund - Global REITs
  • PHT - Closed-End Fund - High Income Debt
  • SKT - Tanger Factory Outlets

Some of these are currently selling at a premium to their net asset value, so are not buy candidates. At present, I do not anticipate on purchasing any of the above prior to end of year.


The intention of this article was to provide more information relative to the PPRP, its holdings and my current thoughts on the markets and future holdings.

I am in NO way recommending purchase of any of the equities mentioned in this article. My goal is to share how I assemble a portfolio, and provide my methodology for making stock selections. Please, do your own due diligence - I am certain that many of you can come up with ideas that I have not as yet uncovered. In fact, many of you may have a better way of handling the whole retirement investment process.

Disclosure: I am/we are long ALL STOCKS/FUNDS MENTIONED IN PORTFOLIO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.