Readers of this web site who acted on our recommendations to buy into discounted closed-end income funds have been rewarded in a big way in the past couple of years. Not only have these funds acted just like they have promised by supplying generous income, but we have seen some nice growth thanks to many "out of favor" positions and significant discounts. Since the bond market began losing ground in June of 2003, we are now beginning to again see some discounts and out of favor position in closed-end bond funds. With individual bonds, preferreds and convertibles trading still at high premiums and low yields, many closed-end funds are again a bargain in many sectors. In 2004, I again urge you to educate yourself on these instruments. If you are seeking to get good income in a diversified portfolio or just seeking to balance your investments by, for example, adding income to an IRA, consider the addition of closed-end funds to your portfolio. If after reading this you'd like to follow through but hire a fee-only financial planning firm to help you, consider my private company Capital Investment Advisors, Inc. See more information at www.yourwealth.com To get an appointment to see any of my advisors or myself, call Natalie Lee at 404-531-0018.

Let's again look at the pros and cons of closed end income trusts and funds. First the benefits:

• Diversity in what you own. A typical trust owns millions of dollars in income securities diversified in many companies.
• Ability to combine diversified trusts in various sectors. I can buy real estate, utilities, government bonds, corporate bonds, mortgages, bank notes, convertibles and more by purchasing a half dozen different trusts in different areas. Some trusts are diversified within themselves, such as the Scudder Multi-Market Trust which buys U.S. Government bonds and notes, foreign country bonds and notes and U.S. Corporate bonds, notes and other commercial paper.
• The manager of many bond funds turn over the fund to take gains, adding to my yield. This also means they are purchasing new bonds at higher yields when rates move up in the coming years. This way you are not "left behind" if or when rates begin to rise. Combine this approach with bonds and preferreds you already hold and you have a perfect income portfolio.
• Most funds I choose have a long history of price stability and excellent stable yields. Unlike their open-end cousins, closed end income funds exist only to pay a monthly dividend. Judge them on consistent yield and long term price stability, not on total return.
• Of course, one of the main attractions is buying one of these at discount, meaning when a fund is trading at a 5% discount, it is like buying $100 of bonds at $95.
• These funds can leverage, a technique that add substantially to yield in some funds. Use of leverage in some funds can be justified in a diversified portfolio of closed end trusts and funds.

There are also obvious disadvantages:

• You have to buy these like you do shares of stock and pay a commission. Since these sell for under $10 a share in many cases, you could easily run into higher costs for a block trade. Note that even at discount brokers, the flat trade rate is for buying and selling 100 shares or less. Over that there is another rate, such as 2 to 3 cents per share. Your commission costs could be significant, but you want to buy and hold long term, so figure you are amortizing this cost over a long period of time.
• Unlike a preferred or bond, you have fluctuaton of both price and yield. However, with many people fearing rates have bottomed out, income funds that purchase bonds are positioned to take advantage of higher rates in coming years. Better yet, you can move into various income opportunities (such as moving out of long term bonds to real estate funds) and take advantage of professional management of existing closed portfolios, where the manager does not have the pressure of sudden redemptions. So, closed end funds in many cases can be more stable than their open-end cousins.
• Trust and fund management expenses are higher than other investments. This is a tough pill for me to swallow, except I see fund managers really hard at work and with active trading they do rack up expenses. However, the trusts I have chosen have consistently provided the one outcome I am looking for - a very nice yield with relative price stability and incredible diversity.
• Information on these is tough to come by. You have to do some digging on closed end trusts and closed end funds. Closed end funds are listed each day in the Wall Street Journal and each week in Barron's. But one of the best places is the web site of the Closed End Fund Association at www.cefa.com
• Leveraged funds can show dramatic price declines when rates go up. Be aware of this and be prepared when it happens to hold on longer term. However, combine a couple of leveraged higher yield funds with more conservative non-leveraged funds and you have a perfect combination.

My money management firm offers professional selection of closed end funds on a fee-only basis for individual clients. For an appointment to see any member of Mike Kavanagh's Money Team call Natalie at 404-531-0018.

* Not meant to be an offer to buy or sell specific securities. This is not a complete analysis of any company, industry, or security. Opinions expressed are subject to change without notice. Statements of fact have been obtained from sources considered reliable but no representation is made as to their completeness or accuracy. There is no certainty that the parameters, assumptions or market conditions can be duplicated in actual transactions. Some higher yields may involve below investment grade securities which can present significant risks, including, among other risks, higher risk of default on interest and principle payments, the risk of lower market liquidity, and the risk of greater market price fluctuation than those of investment grade securities.