Considering the crazy week in the market, we feel investors need some perspective. If your portfolio falls 10%, it must increase by 11% to break even. Likewise, if it falls 50%, you need it to go up 100% to break even. When it drops 60%, it must gain 150%, which shows downside matters. We do not mean to trivialize what happened in 2008 or what even happened this week, although we seem perpetually bullish.
Let’s take a look at your portfolio, down 50%. If you earn 1% a year, it will take you 70 years to break even. People who left stocks bought Treasury bonds yielding less than 1%. While we cannot say that this was a correct move for each individual, it simply does not make sense to us.
If you earn 5% each year, it will take you 15 years to break even after a 50% loss. If you earn 10% a year, you will break even in eight years. This illustrates that no one ever said there was short-run solution to the problem.
Investors ask, “How do you defend against this?” They say, “You always say to buy stocks and preach the Ten Year Rule. You don’t ever do anything.” That is simply not true. It is often the case that investors are not paying attention when we do something. When the Dow was at 12,800 earlier this year, we followed the Ten Year Rule for clients. We decided it was time to sell to provide for liquidity needs for the next 10 years. We sold when we thought the market was overvalued. Was the market overvalued? We do not know for sure, as the market could go higher later this year.
Sometimes an active portfolio decision often leads you to do nothing. That is the decision. When you see moves like Monday, down 5%; Tuesday, up 4%; Wednesday, down 4%, Thursday, up 5% you have to ask yourself, “Why?” If you cannot answer, or do not understand what is causing it, your answer could be that you do not want to do anything differently. You have a plan, and you decide to stick to it.
We have to believe that we have 91% employment in this country. When we are on I-75 during rush hour, we sit in traffic, indicating people are working. Unless you cannot feed your family or clothe your children, people are going to spend money. Will it be more this year? Nobody can predict that. When we have a roller-coaster week in the market, we get caught up in a vacuum of bad news.
Look at commodities: gold, silver, oil. Generally, commodities only increase in value at the rate of inflation long term. They are inputs; they do not do anything by themselves. Why is the price of gold so high right now? We believe it is because people are manipulating it. We are inundated with ads selling gold. They say you can spend it, but try going into your local grocery store and lopping off a nugget of gold to pay for your food. They say they can convert it for you—into what? Dollars.
We feel you need to look at the market in practical terms. For example, say you own the corner dry cleaner business, and in 1999, you earned $45,000 in profit. Now in 2011, you are earning $90,000 in profit. Wouldn’t you think that your business is worth more today than it was 11 years ago? In perspective, in 1999, the S&P companies earned roughly $45 per share. In 2011, after second-quarter earnings, S&P companies earned about $96 per share. However, the Dow is about the same level as it was in 1999. This is why we find stocks to be a cheap investment.
Now consider dividends. We have a high yield portfolio that is averaging near 5%. Some holdings include, Verizon Communications (NYSE: VZ) yields 5.8%, Vodafone Group Plc (NASDAQ: VOD), yields 7%; Chevron Corp. (NYSE: CVX), yields 3.44%; Royal Dutch Shell Corp. (NYSE: RDS.A), yields 5.48%; Total S.A. (NYSE: TOT), yields 7.1%; Cincinnati Financial Corp. (NASDAQ: CINF), yields 6.6%, and GlaxoSmithKline Plc. (NYSE: GSK), yields 5.48%. Our Traditional Portfolio yields approximately 3% and includes H. J. Heinz Co. (NYSE: HNZ) yielding 3.9% and McDonald’s Corp. (NYSE: MCD) yielding 2.9%.
It does not make sense to us to buy a CD for two years paying 0.5%. The only place we see to get a better cash-on-cash return is in real estate, but real estate is work. McDonald’s is going to pay a dividend, even if you do not show up for work.
When the market gets crazy, investors want to do something. The government has been doing something since 2008, and you have to ask, “Has it helped?” Sometimes you have to let the medicine do its work. You cannot cure a sinus infection with one dose of medicine. You have to take antibiotics for the prescribed number of days.
So we say again, in no way should you ever have money you need within the next 10 years in the stock market. When liquidity needs have been satisfied, where can you put your money and earn what you can in the stock market?
At Henssler Financial, we believe you should Live Ready, yet sometimes that means an active portfolio decision of doing nothing. If you have questions regarding your investment strategy, the experts at Henssler Financial will be glad to help. You may call our experts at 770-429-9166 or e-mail at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
