We often get questions about ‘safety’ in investing. As we have stated before, the word ‘safe’ is a misnomer when one is talking about the stock market. We need only repeat some recent blogs to illustrate the point.
First, major meltdowns occur with such regularity that they are the norm rather than the unusual. Meltdowns are the leading destroyer of a portfolio’s performance. In every meltdown, investors get frightened and sell at the worst time, thereby permanently diminishing the value of their portfolio.
Next, have a look at the market over the last decade. Take the Dow Jones Composite Index as an example. In September 2000, the Dow Jones Composite Index was exactly at the level that it is now. Does it sound like a wise investment to buy only a portfolio of “blue chips” as many Advisors have recommended? In between, we had everything from the tech bubble of year 2000, to the credit crunch of 2007, to the meltdown of 2008, to the current malaise.
Maybe a composite package of dividend yielding stocks would have done better. I don’t think so. Have a look at some of the statistics quoted later in this blog. The average amount of composite dividends has been dropping for quite a while, and when you take inflation and income taxes into account, these investments are net losers. Add to this foolishness the fact that the market value of these stocks has dropped along with their dividends, and the investor would have been far better off in any commodity.
This goes against mainline thinking, which often talks about safety in large caps or in dividend stocks. We can’t agree. To get a dividend of 1% to 3%, which is taxable, makes the return actually negative when inflation is taken into account.
To us, this is the opposite of safe. In effect, you makes nothing on your investment, yet you risk 100% of your money. If anything goes wrong with a stock, the losses on that stock will be many times the value of the dividend that you received.
Does this make sense to you. Or is this just an enormous gamble with the odds stacked against you?
Some Numbers to Back up This Statement
One of the commentaries that we read is “Ron Rowland’s Invest With An Edge” newsletter. As an illustration of the point we are making, we quote his most recent analysis.
Dividend investment strategies can and do experience severe declines in dividend payouts. The largest dividend ETF, iShares Dow Jones Select Dividend ETF (DVY), had a 31.4% reduction in dividends from 2008 to 2009. The 2010 per share distribution amount was 29.8% below the 2008 level.
Not only have the dividend yields fallen, but the value of the stocks have fallen accordingly. Placing your money in a dividend yielding portfolio, can devastate your retirement income pretty quickly if the tides turn against you.
The Current Reality
When we examine the long standing beliefs about “buy and hold”, or “dividend yields”, or “safety in blue chips” or all of the rest, what becomes evident is that we are in a new reality and have been for some time.
The New Reality
Information technology makes information fly around the world in nanoseconds. There is no longer an interval of time where someone knows more and quicker.
The old adages and beliefs are just that – old. In most cases they don’t apply any more. The most important old belief – diversity or diversification, is dead as a doornail. You have to understand and follow what is happening in the world today. Diversification into sectors that are not future performers is a disaster for your portfolio.
The majority of trading is now done by software reacting to multitudes of factors based on charting and indicators. Value is not a factor for most of the trading.
New markets are emerging in China and elsewhere that do not have the long standing traditions of the Western Markets. Frauds, mis-statements and promotions abound, with new scandals almost a daily occurrence. All of this has effect on the older stock markets.
There are much greater pools of money flying around the world at record speed looking for profit. it started with the Euro dollars 30 years ago, then the petro dollars, then the massive deficits of all Western nations that flowed to the new economies and are being utilized in many strange ways.
and lastly, the aging of the population worldwide, following the baby boom after WWII. There are so many people nearing or in retirement that are dependent on their pensions, and their pensions are dependent on the stock market.
To maintain your lifestyle in the age of low interest rates, deflation, and market meltdowns, you have to be more proactive. You have to invest in what is the future, and you have to judge all advice given by your Advisors in light of these new realities.
Next – Some Concepts in How to Cope With The New Reality
The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.
Comments are closed.