You have to wonder if Wilbur and Orville Wright ever imagined such possibilities when they first flew the Flyer in Kitty Hawk, NC in 1903. 115 years later, Elon Musk would not only launch, but successfully land the boosters from, the most powerful rocket ever.
While the media wants to create sensationalism with headlines like “Market Crashes,” “Dow Plunges” and “Stocks Plummet,” we must admire their fervor to stick to their story. Clearly as progress marches on, they hold ever so tightly to the short term opportunity to create panic and avoid the inevitable optimistic outcomes. I dare you to watch this short clip of the launch and not be in awe of mankind’s ability to prosper.
In some ways, 2008 seems like only yesterday when the Dow Jones Industrial Average (DJIA) dropped below 7,000. Clearly, a 1,000 drop from those levels would have been eye-opening. Yet here we are today with the DJIA hovering just below all-time highs.
“It’s gone up too much too quickly”
That has been the mantra of the day. We have probably heard that phrase twice a day for the past 6 months. But has it?…Has the market gone up too far, too fast?
In February of 2008, the DJIA was at about 12,500. With it hovering around 25,000 today, that’s only about a 7% compounded growth rate over the past 10 years. That’s 3% below the long term average of 10% (source: Yahoo Finance).
But what about income? At SRQ Wealth, for those focused on retirement, we say that protection of income is more important than the protection of principal. Why? Let’s face it…you don’t live on your principal, you live on the income from your principal (or from social security, pensions, rental income, etc.) So wouldn’t it be just as valuable to review what has happened to portfolio income over that same time period?
The current dividend yield of the S&P 500 is about 1.87%. That’s about what it was 10 years ago. No growth, right? While the yield percentage has not changed much, the dollar amount of that income has changed dramatically.
To demonstrate, let’s use an example of two investors, Albert and Bozo.
Albert, being a smart scientist, invested $100,000 into stocks representing the DJIA 10 years ago. This created $1,870 of dividend income ($100,000 x 1.87%). Bozo was no clown; he did the same. But when the “Great Recession” happened just a few months later, both saw their principal drop about 50%.
Bozo focused on his principal and sold his stocks, because he felt he could not afford to lose any more. Still needing income, he placed his remaining $50,000 in “safe” CDs at a much better 4% interest rate. Albert focused on his income, saw his income was intact, and made no changes.
Today, Bozo’s principal is “safe,” still at $50,000, and for 10 years, assuming he got the same 4% return every year, has made $2,000 per year. Meanwhile, Albert got about $1,870 of interest the first year, but by Year 10, his income had grown to about $3,740 per year (the market doubled and so did his principal: $200,000 x 1.87% = $3,740).
So while Bozo felt safe, he actually had all the risk…risk of loss of purchasing power. Albert, by doing nothing, had twice as much income. Lest we forget, that Albert’s $100,000 is now worth $200,000 too. (DJIA grew from 12,500 to 25,000).
The moral of the story:
Focus on the income your portfolio can produce and you’ll be a rocket scientist, like Albert. Focus on only the principal, and you may just end up feeling like a clown - like Bozo.
At SRQ Wealth, we watch markets closely, implement managed portfolio strategies that aim to to capture returns for aggressive investors and manage risk for those more conservative. Understanding when and how much income is needed, and teaching clients how to understand - and appreciate - volatility can help create meaningfully different outcomes. Markets go up and down and are unpredictable. But investor behavior is predictable - and properly guided - can make all the difference in successfully meeting one’s goals.
The examples listed herein are hypothetical and not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Investing involves risk including loss of principal. No strategy assures success or protects against loss.