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Party on, Rain or Shine

The burning market question seems to be whether the Fed, in its effort to tamp down inflation, might push the economy into recession. The way this question plays out will likely determine the near-term trend of equity prices. If recession is in the cards, we will be prepared to defend against it and attempt to capture profits from those who panic. Investors should be prepared to experience price volatility if it appears that the economy is slipping into recession. We are prepared with several years of cash-flow funded from reserves and future dividend and interest payments.

It is important to remember that our portfolios are built with enduringly successful companies – businesses that are constantly refining their strategies to meet the needs and wants of customers around the world. Yes, their share prices go up and down, but their economic value grows over time and is ultimately recognized, as market history shows.

HCM’s goal is to build strategies that provide growth, inflation protection, safety, and reliable streams of growing income that allow you to enjoy your lifestyle, without worry, during difficult markets. A key ingredient in HCM’s secret sauce for financial independence during difficult markets is the compounding power of growing dividends. This is why we incorporate dividend growth and safety-net protection tactics into each of the retirement portfolio strategies we oversee.

How has the strategy fared? Dividends paid by the S&P 500 increased 28.6 times between 1960 and 2020, while inflation increased by only 8.7 times in the same period. Dividends paid by the S&P 500 grew at more than triple the rate of inflation. But, you might ask, what about big inflation years like 2022 when inflation spiked by 8%? No big deal, dividends in the S&P rose 11% that year, crushing inflation.

Dividends are great at providing predictable, growing income to help smooth out rocky markets while providing the time for quality companies to grow to meet long-term wealth goals. But owning enough equities can be scary, especially when the markets fall. Since 1960, the S&P 500 has been nearly cut in half on three different occasions. Smaller declines of 10%, 20%, and 30% happen more frequently. 

Of course, the opposite is also true because stocks move forward more often than they go in reverse. For example, the S&P 500 was trading at $58 in 1960 and closed last year at $3,840. The market increased by about 66 times during those years, or more than six times the rate of inflation.

The Lost Decade

If stocks always go up (eventually), why do we need to worry about risk management? If you never plan to take money out of your portfolio, you probably don’t. However, those who do need to take money out of their portfolio to pay the bills need a risk management plan to avoid a premature liquidation of their nest egg. Most recently, the period from 2000-2009 yielded an annualized total return of -0.9%, inspiring the nickname “the lost decade.”

Increasing withdrawals to keep up with inflation during extended periods of negative market returns may cause premature portfolio liquidations if one is not prepared. This is why it is critical to utilize sustainable withdrawal strategies that anticipate the fact that markets will experience multiple deep declines during an average retirement.

HCM works to be prepared for surprises, both when the sun is out and when the storm clouds gather, so you can Party On, Rain or Shine, without worrying. 

Return to July 2023 Newsletter

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