Are stock numbers really important?

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

  • GDP has risen, unemployment has fallen; Income tax rates lower, vacancies rise… The economy is so strong that it has been stable to bullish since April amid higher interest rates and a trade war looming. Imagine that!

But how does this pattern affect you, especially if you’re retired or “soon-to-be”? Does a flat or lower stock market mean you can increase your portfolio returns or need to sell assets to maintain your current drawing on your investment accounts? Unfortunately, for almost all of you, it’s the latter.

I’ve read that after inflation, 4% is considered the “safe” portfolio withdrawal rate for most retirees. However, most retirement portfolios generate less than 2% of actual income to be spent, so at least some securities liquidation is required each year to keep the stream going…

But if the market is up an average of 5% each year, as it has since 2000, then everything is fine, right? We’re sorry. The market just doesn’t work that way, and as such there is absolutely no doubt that most of you are unprepared for a scenario even half as grim as some of the realities that have wrapped up over the last twenty years.

(Note that the NASDAQ composite index took about sixteen years to rise above its 1999 peak…even with the mighty “CATCH”. The entire 60%-plus increase occurred in the last three years, similar to the 1998 to 2000 “No Value” rally.)

  • The NASDAQ has only risen 3% annually for the past 20 years, including producing less than 1% in spending money.

  • Despite the rally of 1997-99, the S&P 500 was down 4% (including dividends) from late 1997 to late 2002. Capital approx. 28%. So her million-dollar portfolio grew to $720,000 and was still raking in less than 2% of actual issuance per year.

  • The ten-year scenario (1997 to 2007) saw the S&P rise modestly by 6%, or growth of just 0.6% a year, including dividends. This scenario results in an annual wealth reduction of 3.4% or a loss of 34%… Your million has been reduced to $660,000 and we haven’t reached 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 0.17% per year. That 3.83% annual reduction took the $660,000 down another 25%, leaving just $495,000.

  • The S&P 500 gained about 5% from late 2013 through late 2015, another 5% drop, taking “the egg” down to about $470,000.

  • So although the S&P has gained an average of 8% per year since 1998, it has almost always failed to cover a modest 4% withdrawal rate…that is, in almost all but the last 2.5 years.

  • Since January 2016, the S&P is up about 48%, bringing the nest egg back to about $695,000…about 30% below where it was 20 years ago…with a “safe” 4% draw.

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

And what if the 4% per year payout rate is a less-than-realistic barometer of what the average retiree wants (or needs) to spend each year? What if a new car is needed, there are family health issues/emergencies…or you get the urge to see how the rest of the world is?

These realities put a huge hole in the 4% per year strategy, especially if any of them have the audacity to step up when the market is in a correction, as it has been almost 30% of the time during this 20-year bull market case was. We won’t even touch on the very real possibility of bad investment decisions, especially in the late stages of rallies… and corrections.

  • The market value growth and total return focused approach (Modern Portfolio Theory) simply isn’t enough to develop an investment portfolio that is ready for retirement income…a portfolio that actually grows income and working investment capital, regardless of fluctuations in the stock market.

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

In my opinion, and having implemented an alternative strategy both personally and professionally for nearly 50 years, the 4% drawdown strategy is pretty much a “pot” of Wall Street misinformation. There’s no direct correlation between the market value of your portfolio and your spending needs in retirement, nadda.

Retirement planning needs to be primarily an income planning and perhaps a growth target investment. Growth purpose investing (the stock market, no matter how the packaging disguises it) is always more speculative and less income-generating than income investing. This is exactly why Wall Street likes to use “total return” analysis instead of simple “return on invested capital.”

For example, let’s say you invested the million-dollar 1998 nest egg I mentioned above 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 (meaning less speculative) and traded on the NYSE. These are called “investment-grade value stocks,” and regularly trade at gains of 10% or less and are reinvested in similar securities that are at least 20% down from their yearly highs.

  • In addition, closed-end equity funds (CEFs), particularly when stock prices are buoyant, offer diverse equity exposure and return levels for spending money typically in excess of 6%.

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

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

  • A diverse range of CEFs for income purposes that includes corporate and government bonds, debentures and loans; Mortgage and other real estate-based securities, preferred stocks, senior loans, floating rate securities, etc. The funds have, on average, a decade-long track record of paying income.

  • They also trade regularly at reasonable profits and are never held past the point where interest can be realized for a year in advance. If banks’ CD interest rates are less than 2% per annum, as they are now, a short-term gain of 4% (between 7% and 9% reinvested) is not to be scoffed at.

The MCIM portfolio is managed and managed in such a way that the 4% drawdown (and a short-term contingency reserve) consumes only about 70% of total income. It’s the “stuff” needed to pay the bills, fund the holidays, celebrate life’s important milestones, and protect and care for loved ones. You just don’t want to sell assets to attend to necessities or emergencies, and here’s a fact of investing life Wall Street doesn’t want you to know:

  • Stock market fluctuations (and interest rate changes) generally have absolutely no impact on returns from securities you already own, and falling market values ​​are always an opportunity to add to positions…

  • This reduces the cost basis per share and increases your return on invested capital. Falling bond prices are a far more significant opportunity than similar corrections in stock prices.

An asset allocation of 40% equities and 60% income (assuming 4% income on the equity side and 7.5% on the income side) would have produced no less than 6.1% in real pocket money, despite two major market falls that this country-shattered world in these twenty years. And that would have:

  • eliminates all annual claims and

  • produced almost $2,000 a month for reinvestments

After 20 years, that million dollars would have become approximately $1.515 million in 1998 and would generate at least $92,000 in spending money per year… Note that these numbers do not include net capital gains from trading and reinvestments at rates better than 6.1 %. So that might be a worst-case scenario.

So, stop chasing after that higher market value “holy grail” that your financial advisors want to worship with every emotional and physical fiber of their financial consciousness. Free yourself from the limitations of your earning potential. When you leave your permanent job, you should be earning almost as much “base income” (interest and dividends) from your investment portfolios as you had in salary…

Somehow, in today’s retirement scenarios, income production just isn’t an issue. 401k plans do not need to be deployed; 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 numbers. Just ask them to rate your current income generation and count the “ums,” “ahs,” and “buts.”

You don’t have to accept that, and neither market value nor total return focus will make you ready for retirement. Higher market values ​​fuel the ego; Higher income fuels the yacht. what’s in your wallet