Do Stock Market Numbers Really Matter?
Gaming

Do Stock Market Numbers Really Matter?

The last “all-time high” in the S&P 500 (2,873) was reached just over six months ago, on January 26. Since then, it’s down roughly 10% on three different occasions, with no shortage of “volatility” and a host of expert explanations for this persistent weakness in the face of incredibly strong economic numbers.

  • GDP goes up, unemployment goes down; Lower income tax rates, number of job vacancies on the rise… The economy is so strong that, since April, it has leveled off in the face of higher interest rates and a looming trade war. Go figure!

But what impact does this pattern have on you, particularly if you are a retiree or “future future”? Does a flat or lower stock market mean that you will be able to increase your portfolio income or that you will have to sell assets to maintain your current withdrawal from your investment accounts? For almost all of you, unfortunately, it is the latter.

I’ve read that 4%, after inflation, is considered a “safe” portfolio withdrawal rate for most retirees. However, most retirement portfolios produce less than 2% of actual disposable income, so at least one security clearance is required each year to maintain power…

But if the market is up an average of 5% each year, as it has been since 2000, then all is well, right? I am sorry. The market just doesn’t work that way, and as a result, there is no doubt that most of you are not prepared for a scenario even half as bleak as some of the realities contained in the last twenty years.

(Note that it took the NASDAQ Composite Index roughly sixteen years to rise above its 1999 high… even with the mighty “FANG”. All of its 60+% gain has occurred in the last three years , just like in the “worthless” rally from 1998 to 2000).

  • The NASDAQ has risen just 3% a year for the past 20 years, including producing less than 1% in spending money.
  • Despite the dot-com rally between 1997 and 1999, the S&P 500 lost 4% (including dividends) from the end of 1997 to the end of 2002. This translates to almost 5% annual asset flight or loss. total capital around 28%. Thus, his million dollar portfolio became $720k, and he still returned less than 2% per year of real spending money.
  • The ten-year scenario (1997 to 2007) saw a modest 6% gain in the S&P, or just 6% growth per year, including dividends. This scenario produces a 3.4% annual asset decline, or a 34% loss…your million is down to $660K, and we’re not in the great recession yet.
  • The 6 years from 2007 to 2013 (including the “great recession”) produced a net gain of about 1%, or a growth rate of about 17% per year. This 3.83% annual reduction caused the $660,000 to drop another 25%, leaving a savings of just $495,000.
  • The S&P 500 gained about 5% from the end of 2013 to the end of 2015, plus another 5%, bringing the “egg” down to about $470,000.
  • So even though the S&P has gained an average of 8% per year since 1998, it has failed to cover a modest 4% drawdown rate almost all the time…that is, in almost everything except the last 2, 5 years.
  • Since January 2016, the S&P has gained about 48%, bringing the original savings back up to about $695,000…down 30% from what it was 20 years earlier…with a draw” insurance” of 4%.

So what if the market does so well (yes, sarcasm) for the next 20 years and chooses to pull out at some point during that period?

What if the 4% annual withdrawal rate is an unrealistic barometer of what the average retiree wants (or has to) spend each year? What if a new car is needed, or there are health problems/family emergencies…or you want to see what the rest of the world is like?

These realities blow a huge hole in the 4%/year strategy, particularly if any of them have the audacity to occur when the market is in a correction, as it has been nearly 30% of the time during this 20-year bull market. We won’t even get into the very real possibility of poor investment decisions, particularly in the later stages of rallies…and corrections.

  • Market value growth, the total return-focused approach (modern portfolio theory) is simply not enough to develop a retirement income-ready investment portfolio…a portfolio that actually grows income and growth. working investment capital, regardless of the turns of the shares. market.
  • In fact, the natural volatility of the stock market should help produce income and capital growth.

So in my opinion, and I have been implementing an alternative strategy both personally and professionally for nearly 50 years, the 4% drawdown strategy is more or less “nonsense”… of Wall Street misinformation. There is no direct relationship between your portfolio’s market value growth and your retirement spending requirements, nadda.

Retirement planning should be income planning first, and perhaps investing for growth goals. Investing for growth purposes (the stock market, no matter how it’s hidden from view by the packaging) is always more speculative and less productive than income investing. This is precisely why Wall Street likes to use “total return” analysis rather than just “return on invested capital.”

Let’s say, for example, that you invested the $1 million in 1998 retirement savings I referred to earlier in what I call a “Market Cycle Investment Management” (MCIM) portfolio. The equity portion of an MCIM portfolio includes:

  • Dividend-paying individual stocks rated B+ or better by S&P (therefore less speculative) and traded on the New York Stock Exchange. These are called “investment-grade value stocks,” and they regularly trade for gains of 10% or less and are reinvested in similar securities that are down at least 20% from one-year highs.
  • Additionally, especially when stock prices are bubbly, Closed-End Equity Funds (CEFs) provide diverse exposure to stocks and levels of return on expense money typically above 6%.
  • The equity portion of such a portfolio typically yields more than 4%.

The income portion of the MCIM portfolio will be the largest investment “cube” and will contain:

  • A diverse assortment of CEFs for income purposes containing corporate and government bonds, notes and loans; mortgages and other real estate-based securities, preferred stock, senior loans, variable-rate securities, etc. The funds, on average, have a history of paying income that spans decades.
  • They also trade regularly for reasonable profits, and are never held past the point where a year’s interest in advance can be realized. When bank CD rates are less than 2% per year as they are now, a short-term gain of 4% (reinvested between 7% and 9%) is not negligible.

MCIM’s portfolio is allocated and managed on an asset basis so that the 4% drawdown (and a short-term contingency reserve) consumes only about 70% of total revenue. Those are the “stuff” needed to pay bills, finance vacations, celebrate life’s important milestones, and protect and nurture loved ones. You just don’t want to sell assets to meet essential needs or emergencies, and here’s a fact of investing life that Wall Street doesn’t want you to know:

  • Stock market gyrations (and changes in interest rates) generally have no impact on the income paid on securities you already own, and falling market values ​​always provide an opportunity to increase positions. .
  • Thus reducing your cost-per-share basis and increasing your return on invested capital. The decline in bond prices is a much more important opportunity than similar corrections in equity prices.

An asset allocation of 40% equity and 60% income (assuming 4% equity side income and 7.5% income side) would have produced no less than 6.1% in real spending money, despite two major market crashes that rocked the world during those twenty years. And that would have:

  • eliminated all annual provisions, and
  • produced almost $2,000 per month for reinvestment

After 20 years, that one million dollars, 1998, savings would have become approximately $1.515 million and would generate at least $92,000 in spending money per year…note that these figures do not include net capital gains from the trading and reinvestment at rates better than 6.1%. So this is perhaps the worst case scenario.

So stop chasing that “Holy Grail” of higher market value that your financial advisors want you to worship with every emotional and physical fiber of your financial consciousness. Free yourself from restrictions on your ability to earn income. When you leave your final job, you should be earning almost as much in “base income” (interest and dividends) from your investment portfolios as you were earning in salary…

Somehow, income production just isn’t an issue in today’s retirement planning scenarios. 401k plans are not required to provide it; IRA accounts are generally invested in Wall Street products that are not structured to generate income; financial advisors focus on total return and market value figures. Simply ask them to assess your current revenue generation and count the ‘ums’, ‘ahs’ and ‘buts’.

You don’t have to accept this, and you won’t be ready for retirement with a market value or total return approach. Higher market values ​​feed the ego; higher levels of income feed the yacht. What’s in your wallet?

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