Accounting Cash Flows Where Would Investment Dividend Income Go Do Stock Market Numbers Really Matter?

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Do Stock Market Numbers Really Matter?

The last “all-time high” in the S&P 500 (2,873) was hit just six months ago, on January 26. Since then, it has fallen roughly 10% on three separate occasions, with no shortage of “volatility”, and an abundance of expert explanations for this troubling weakness in the face of surprisingly strong economic numbers.

  • GDP increased, unemployment decreased; Income tax rates are low, the number of jobs being filled is growing… The economy is so strong that, since April, it has stabilized upward in the face of higher interest rates and an impending trade war. Go figure!

But how does this pattern affect you, especially if you’re a retiree or “soon to be”? Does a flat or low stock market mean you can increase your portfolio income, or will you need to sell assets to maintain your current draw from your investment accounts? For almost all of you, unfortunately, it’s the latter.

I’ve read that 4%, after inflation, is considered a “safe” portfolio withdrawal rate for most retirees. Most retirement portfolios yield less than 2% of actual disposable income, however, requiring at least some security liquidation each year to keep going…

But if the market goes up an average of 5% per year, like it has since 2000, everything is fine, right? sorry Markets don’t work that way, and as a result, most of you are no doubt unprepared for a scenario half as bleak as many of the realities of the last twenty years.

(Note that it took nearly sixteen years for the NASDAQ Composite Index to rise above its 1999 peak… even with the mighty “FANG”. All of its 60%+ gains have come in the past three years, just like the 1998 to 2000 “no value” rally .)

  • The NASDAQ has grown only 3% annually over the past 20 years, including less than a 1% return on spending money.

  • Despite the dot.com rally from 1997 to 1999, the S&P 500 lost 4% (including dividends) from 1997 to year-end 2002. This translates into an asset drain or total loss of 5% per year. About 28% capital. So your million dollar portfolio became $720k and still making less than 2% of the money actually spent.

  • Over a ten-year scenario (1997 to 2007) the S & P rose a modest 6%, or just .6% per year including dividends. This scenario creates a 3.4% annual asset reduction or a loss of 34%… Your million is down to $660K and we haven’t even hit the Great Recession yet.

  • In the 6 years from 2007 to 2013 (including the “Great Recession”) net gains were roughly 1%, or about .17% growth per year. This 3.83% annual deduction brings $660k down another 25%, leaving a nest egg of just $495k.

  • The S & P 500, which rose roughly 5% from the end of 2013 to the end of 2015, drew another 5%, bringing the “egg” down to roughly $470k.

  • So, even though the S&P has averaged 8% gains per year since 1998, it has failed to cover the 4% withdrawal rate almost all of the time…that is, almost all of the last 2.5 years.

  • Since January 2016, the S&P has gained roughly 48% bringing the ‘ole nest egg’s payback to about $695k… down 30% from 20 years ago… “safe”, with a 4% draw .

So what if the market does well over the next 20 years (yes, caricature) and you choose to retire sometime during that time?

And what if a 4% per year withdrawal rate is less than a realistic barometer of what the average retiree wants (or has to) spend per year? Need a new car, or have a health problem/family emergency… or just want to see what the rest of the world is like?

These realities put a big hole in the 4% per year strategy, especially since any of these will struggle to happen when the market is correcting, as this 20-year bull market has been around 30% of the time. We won’t even go into the very real possibility of bad investment decisions, especially in the latter stages of rallies… and corrections.

  • A market value appreciation, total return focused (modern portfolio theory) approach doesn’t just cut it to develop an investment portfolio ready for retirement income… a portfolio that actually increases income and working investment capital regardless of stock appreciation. market

  • In fact, the natural volatility of the stock market should help generate both income and capital growth.

So, in my opinion, and I’ve been implementing both personal and professional alternative strategies for nearly 50 years, the 4% drawdown strategy is a “crook” of Wall Street misinformation… There is no direct correlation between the growth in the market value of your portfolio and your spending needs in retirement, Nadda.

Retirement planning comes first with income planning and growth objective investing. Growth investments (share market, no matter how disguised by the packaging) are always more speculative and lower yielding than income investments. That’s why Wall Street likes to use “total return” analysis instead of the plain vanilla “return on invested capital.”

For example, in 1998, you invested in the 1998 retirement nest egg I refer to above, which I call a “market cycle investment management” (MCIM) portfolio. The equity portion of the MCIM portfolio includes:

  • Dividend paying individual equities rated B+ or better traded on the S & P (thus less speculative) and traded on the NYSE. These are called “investment grade value stocks” and they routinely trade for gains of 10% or less and are reinvested in similar securities that are down at least 20% from their one-year highs.

  • Additionally, especially when equity prices are high, equity closed end funds (CEFs) offer diversified equity exposure and expense money yield levels typically above 6%.

  • The equity portion of such a portfolio typically yields more than 4%.

The income portion of the MCIM portfolio will be a large investment “bucket” and include:

  • Various classifications of income oriented CEFs consisting of corporate and government bonds, notes and loans; Mortgage and other real estate based securities, preferred stocks, senior loans, floating rate securities, etc. Funds, on average, have income payment track records that span decades.

  • They are also traded regularly for a reasonable profit, and are never held beyond what a year’s interest can be paid in advance. When bank CD rates are as low as 2% per annum as they are now, a 4% short-term gain (reinvested between 7% and 9%) is nothing to sneeze at.

Assets in MCIM portfolios are allocated and managed so that a 4% drawdown (and a short-term contingency reserve) costs only 70% or so of gross income. This “stuff” is needed to pay bills, fund vacations, celebrate important life milestones, and protect and care for loved ones. You don’t just want to sell assets to take care of necessities or emergencies, and here’s a fact of investment life that Wall Street doesn’t want you to know:

  • Changes in the stock market (and changes in interest rates) generally have no effect on the income paid by the securities you own, and falling market values ​​always provide an opportunity to add to positions…

  • Thus reducing their cost per share basis and increasing your return on invested capital. Falling bond prices are a more important opportunity than similar corrections in share prices.

A 40% equity, 60% income asset allocation (assuming 4% income from the equity side and 7.5% from the income side) would have yielded less than 6.1% in actual cost money, due to two major market downturns in the world in those twenty years. And it will have:

  • Eliminated all annual draw downs, and

  • Produced about $2,000 a month to reinvest

After 20 years, that million dollar, 1998, nest egg would have been roughly $1.515 million and generating at least $92,000 in spending money per year… Note that these figures do not include net capital gains from trading and reinvestment at optimal rates. than 6.1%. So this is, perhaps, the worst case scenario.

So stop chasing the high market value “holy grail” that your financial advisors want you to worship with every emotional and physical fiber of your financial consciousness. Break free from restrictions on your earning potential. When you leave your final employment, you should be earning almost as much in “base income” (interest and dividends) from your investment portfolio as you were in salary…

However, income generation is not an issue in today’s retirement planning environment. 401k plans are not required to provide it; IRA accounts are typically invested in Wall Street products that are not structured to produce income; Financial advisors focus on total return and market value numbers. Just ask them to assess your current income and count the “ums”, “ahs” and “buts”.

You don’t have to accept this, and you won’t prepare for retirement by focusing on market value or total return. High market values ​​stimulate ego; High income levels fuel the boat. What’s in your wallet?

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