2018 was brutal. 10% up and 10% down in the spring followed by an upward trending summer and early fall. Then Bam! The third quarter set near term records, and not in the right direction, culminating in a 15% drop in a month. What happened Santa?
Suddenly all the new market geniuses created since the election weren’t so smart after all. Simple trend followers were forced to consider that things like earnings and valuations really do matter.
Worse, everything was down. Every S&P 500 sector was negative. Bonds were negative. With seemingly no place to hide, what is an investor to do?
I recently had a conversation with a client that is going to retire this summer. Their concern was that they couldn’t afford the portfolio loss right before retirement. My response was that even with a loss on their net worth, the income, the dividends paid by their portfolio actually increased substantially in 2018. An investor will not go broke if they can live off their dividends and income.
But that is theory. How did it actually work? I did a quick analysis for this client. He owns 24 stocks, with about 30% of the account value in a money market – opportunity money. As the markets decline yields increase, so I have the cash to pick up higher-yielding quality investments later at lower prices to increase his income. Of the 24 stocks held 21 increased their dividend payout in 2018 over their 2017 payout. Two lowered their dividend and one kept it the same. Pretty good batting average. The average unweighted increase in dividends was 11.87%. Meaning the 11.87% assumes equal weighting of all holdings. Since his portfolio is not equally weighted he saw an increase proportional to his holdings, his change in income could have been more or less than 11.87%. So let’s just say +/- 10% on the year. That is a pretty good gain in income anyway you slice it.
This why I always talk about having a plan and sticking to it. Plans may not be needed in raging bull markets, but they are the key to survival in bear markets. Our plan looks something like this: Identify high-quality dividend-paying stocks; Identify those selling for under intrinsic value; Identify those with substantial free cash flow to enable them to increase their dividends annually. Part II is to follow our defined macro signals to raise cash as a market declines to create a war chest for buying more at better prices.
If you don’t have a plan, if you don’t know where your retirement income will come from, feel free to give me a call or drop me an email. We’ll show you how to navigate these markets without having to dust off the resume in retirement.
Happy New Years, and Wishes for Good Returns in 2019!
Bill DeShurko Ofc: 937-434-1790 or Bill@401Advisor.com
Mr. DeShurko is a registered representative of Ceros Financial Services, Inc, (Member FINRA/SIPC). Ceros is not affiliated with 401 Advisor, LLC or Fund Trader Pro. The views expressed are those of Mr. DeShurko and do not necessarily reflect those of Ceros Financial Services, Inc., its employees or affiliates. Past performance is no guarantee of future results.
All investing involves risk.
