It is time to try something new here at DRW Financial! We are going to experiment with video updates to this blog for items that may benefit from a more interactive type of content. To get the film rolling, today we have a short video explaining in basic terms what a financial plan is meant to be.
Investing is not a "one size fits all" pursuit. Every person or family has their own highly individual concerns and goals, capacity and considerations. But perhaps there are some allocations every investor should choose for their portfolios:
Most investment portfolios are going to hold some stocks and bonds, mutual funds, maybe some real estate or insurance products, but if they do not have an allocation to Patience, Love, Charity, and Wisdom, do those portfolios really represent the values of their owners?
The equity markets continue to move upward at a pretty exciting clip this week. Using the S&P 500 as a proxy for the overall market, current levels are more than 20% higher than one year ago:
20% seems like a big number, right? I was curious how many times the S&P 500 had shown year over year gains of 20% or more, and so I did a little home work. With an historical data file download for the index from Yahoo's Finance page, I pulled out the price of the index on the first market day in January for each year going back to 1950. Using this subset of data and a simple spreadsheet calculation, I found that the S&P 500 had gained (from one January to the next) 20% or more 12 different times. That's 12 times in 63 years. If you loosen up the criteria a little to 10%, the number jumps to 32 times the index gained at least that amount in a year over the 63 years studied.
Of course, that means that there were many years that came in at less than 20% or even 10%. Using only this January data, there were 47 years with a positive return of any amount, meaning there were 31 years with some gain but less than 10%. And then there are the years with no gain or even a loss.
The worst yearly return for the data in this study was for the period between January 2008 and Jan 2009...
A year over year loss of 37.58%! (in the Yahoo data, they show a number more like -40%). But how common are double digit losses? Diving back into the data, it looks like there were 3 instances of a year over year decline of 20% or more, and 7 instances of a 10% or greater fall.
What can we take away from this data? There are a few concepts I would like to highlight:
I think the Giving Pledge is a very positive thing, both for the very wealthy folks making the pledge and the people, projects, and communities that stand to benefit from the gifts.
This article describes how the founder of Spanx hosiery, Sara Blakely, is among a group of nine new members of the Giving Pledge group - way to go Sara!
For the past few years, dividend investing has been all the rage. With the US Fed targeting low interest rates in a strategy to stimulate the economy, traditional income investors have been squeezed out of bonds and pushed towards other sources of cash flow. As a proxy for the move in the larger bond market towards lower yields, consider this 5 year look at the 10 year treasury note:
For those investors on a "fixed income", such as a retirees depending on the wealth they accumulated during their working years to sustain them throughout the remainder of their lives, a drop in yield from around 4% down to 1.5% - 2% represented a significant challenge. Is it any wonder that many of those investors began to explore other avenues for income? For many of these people, dividend paying stocks appeared a good option. Well known companies like General Electric and Johnson & Johnson were paying dividend yields at levels much higher than the US treasuries, and competitive with corporate bonds. Here is a chart of the JNJ dividend yield over the last 5 years to contrast with that of the Treasury chart above:
From this view, the argument for dividend stocks versus bonds seems compelling. And it may very well be that a diversified portfolio of dividend stocks with strong underlying economics could meet an investor's objectives for income and growth while meeting their tolerance for risk; however, there are downsides to dividend paying stocks. Here are a few to consider when weighing investment options:
Income investors holding GE stock through that period would have seen their cash flows drop significantly, from more than $0.60 per share down to $0.20, while also seeing their share price drop from a high in the $40s all the way down to a low below $7.50!
To summarize, dividend paying stocks may be a reasonable fit for investors seeking income, but those stocks come with considerable risks and volatility that must be considered within the broader context of the investor's risk tolerance and investment objectives.
David R Wattenbarger, president of DRW Financial
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