Do stock numbers really matter?

The last “all-time high” in the S&P 500 (2,873) was hit just over six months ago, on January 26th. Since then, it has fallen by about 10% on three different occasions, with no lack of “volatility” and an abundance of specialist explanations for this overwhelming weakness in the face of the incredibly strong economic numbers.

  • GDP has risen, unemployment has fallen; lower income tax rates, the number of unfilled jobs growing … The economy is so strong that, since April, it has become stable to the point of growth even in the face of higher interest rates and an imminent trade war. Realize!

But what impact does this pattern have on you, especially if you are retired or “future”? Does a fixed or lower stock market mean that you will be able to increase your portfolio income or that you will have to sell assets to stay current in your investment accounts? For almost everyone, unfortunately, it is behind.

I read that 4%, after inflation, is considered a safe rate of withdrawal of the portfolio for most retirees. Most retirement portfolios produce less than 2% of real expendable income, however, so at least some security clearance is required each year to keep the power on …

But if the market grows by an average of 5% every year, as it has done since 2000, everything is fine, right? I am sorry. The market does not work that way and, as a result, there is no doubt that most of you are not prepared for a scenario even half as gloomy as many of the packaged realities of the last twenty years.

(Note that it took the NASDAQ composite index about sixteen years to rise above the highest level in 1999 … even with the strong “FANG.” All of its + 60% gains have taken place over the past three years, at as in the “worthless” rally from 1998 to 2000.)

  • NASDAQ has grown by only 3% annually over the past 20 years, including production of less than 1% spending money.

  • Despite the rally from 1997 to 1999, the S&P 500 lost 4% (including dividends) from late 1997 to the end of 2002. This translates into an asset leak of nearly 5% on year or a total capital loss of around 28%. So, your multi-million dollar portfolio has grown to $ 720,000 and is still making less than 2% a year of real spending.

  • The ten-year scenario (1997 to 2007) saw a modest 6% gain in S&P or an increase of only 6% percent per year, including dividends. This scenario produces an annual asset reduction of 3.4% or a loss of 34% … your million has been reduced to $ 660,000 and we have not yet reached the Great Recession.

  • 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 annual reduction of 3.83% decreased by $ 660,000 by another 25%, leaving a nest egg of only $ 495,000.

  • The S&P 500, gained about 5% from the end of 2013 to the end of 2015, another 5% draw, bringing the “egg” to about $ 470,000.

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

  • Since January 2016, the S&P has gained about 48%, bringing the “ole” nest egg to about $ 695,000 … about 30% below where it was 20 years earlier … with a “safe” draw ”, With 4%.

So what happens if the market works just as well (yes, sarcasm) for the next 20 years and you choose to retire sometime in that period?

And what if the 4% per annum withdrawal rate is a less realistic barometer than what the average retiree wants (or should) spend per year? What if you need a new car or there are health problems / family emergencies … or do you want to see what the rest of the world is like?

These realities throw a major hole in the strategy of 4% per year, especially if any of them have the audacity to appear when the market is in a correction, as it has been almost 30% of the time in this Bull Market for 20 years. . We won’t even get into the real possibility of bad investment decisions, especially in the final stages of rallies … and corrections.

  • The approach to increasing market value, oriented towards total profitability (Modern Portfolio Theory) simply does not reduce it for the development of a retirement-ready investment portfolio … a portfolio that actually increases working income and investment capital regardless of turnovers stock market.

  • In fact, the natural volatility of the stock market should contribute to the production of both income and capital growth.

So, in my opinion, and I have implemented an alternative strategy both personally and professionally for almost 50 years, the 4% withdrawal strategy is a bit of a “crock” … of misinformation on Wall Street. There is no direct relationship between increasing the market value of your portfolio and your retirement spending requirements, nadda.

Retirement planning must first and foremost be income planning, and the goal of growth can be investment. Investment for growth (the stock market, no matter how it is hidden by packaging) is always more speculative and less productive in terms of income than investment in income. This is precisely why Wall Street likes to use the “total return” analysis instead of the simple “return on investment” of vanilla.

Let’s say, for example, that you invested the million-dollar pension nest egg from 1998 that I referred to above, in what I call a “Market Cycle Investment Management” (MCIM) portfolio. The equity portion of an MCIM portfolio includes:

  • Dividends that pay individual shares listed B + or better by the S&P (so less speculative) and traded on the NYSE. These are called “investment-worth shares” and are regularly traded at a profit of 10% or less and reinvested in similar securities that have fallen by at least 20% compared to one-year highs.

  • In addition, especially when stock prices are excessive, closed-end capital funds (CEFs) ensure a diverse exposure of equity and levels of return on money, usually above 6%.

  • The share of equity in such a portfolio generally produces more than 4%.

The income portion of MCIM’s portfolio will be a larger investment bucket and will contain:

  • A diverse assortment of income-earning CEFs containing corporate and government bonds, notes and loans; mortgages and other real estate, preferred shares, senior loans, floating rate securities, etc. Funds, on average, have records of income payments spanning decades.

  • They are also regularly traded for reasonable profits and are never kept beyond the point where interest can be earned one year in advance. When bank CD rates are less than 2% per year, as they are now, a short-term 4% gain (reinvested between 7% and 9%) is not something to sneeze at.

MCIM’s portfolio is actively allocated and managed, so that the 4% drawdown (and a short-term emergency reserve) consumes only 70% or less of total revenue. This is the “thing” needed to pay the bills, to finance the holidays, to celebrate the important stages of life and to protect and care for loved ones. You just don’t want to sell assets to take care of either the essentials or the emergencies, and here’s a fact of life that Wall Street doesn’t want you to know about:

  • Securities on the stock market (and changes in interest rates) generally have absolutely no impact on the income paid by the securities you already own and, the fall in market values ​​always offers the possibility to add positions …

  • Thus reducing the cost base per share and increasing your return on invested capital. Lower bond prices are a much more important opportunity than similar stock price corrections.

An asset allocation of 40%, 60% of income (assuming 4% of capital income and 7.5% of income) would have produced no less than 6.1% of actual expenditure, despite the two major crises. from the market that shook the world in those twenty years. And that would have:

  • eliminated all annual shooting reductions and

  • produced nearly $ 2,000 a month for reinvestment

After 20 years, that million dollars, 1998, nest egg would have become about $ 1,515 million and would generate at least $ 92,000 spending money a year … keep in mind that these figures do not include net capital gains from trading and a reinvestment at better rates of more than 6.1%. So this is probably the worst case scenario.

So stop pursuing that higher “Holy Grail” market value that your financial advisors want you to worship with every emotional and physical fiber of your financial conscience. Free yourself from restrictions on your ability to win. When you leave a final job, you should earn as much of the “core income” (interest and dividends) from investment portfolios as you earn your salary …

Somehow, income generation is not just a problem in current retirement planning scenarios. No 401k plans are required to provide them; IRAs are generally invested in Wall Street products that are not structured for revenue generation; financial advisors focus on total profitability and market values. Just ask them to rate your current revenue generation and count “UMS”, “ahs” and “but”.

You do not have to accept this and you will not become ready for retirement, either with a market value or a total return. Higher market values ​​fuel the ego; higher income levels fuel the yacht. What do you have in your wallet?

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