No one would deny that 2017 was a banner year for the markets… at the end of the year, all stock indices were near their all-time highs. Even the WSMSI (Working Capital Model Selected Income Index) had a capital growth number close to 12%.
But, let’s bypass the promotional banners on Wall Street and look at the long-term numbers, let’s say this century so far…
You’ll remember that the period from 1999 to 2009 was dubbed “The Dismal Decade” by a Wall Street that simply couldn’t face the idea that the “shock market” (collectively) could actually retrace for such a long period of time.
Did the “bull market” that evolved out of the sad decade really produce the kind of gains you’ve been hearing about?
· From 1999 to 2009, the NASDAQ (home of the “FANG” type companies forever) shrank by 34%. From 1999 to 2017, it was the worst performer of all the indexes, rising just 71%, or an average of less than 3% compounded, per year. So even the spectacular 160% gain in market value since 2009 has not produced a spectacular long-term return.
· From 1999 to 2009, the S&P 500 (although less speculative than the NASDAQ in general) lost an alarming 39% of its value. Recovering faster than the NASDAQ, the S&P has gained approximately 94% in market value over the last 18 years, or an average of less than 4% compounded annually. So there’s not much to celebrate in the S&P either… for the long-term investor.
· From 1999 to 2017, the DJIA’s highest-quality content suffered less than the other indices during the dismal decade, losing less than 1% per year, on average. But its 18-year performance overall, with market value growth of 115%, averaged less than 5% per year. Reflection of higher quality content, yes, but really not that impressive overall.
So what about an investment approach for income purposes during the same two time periods?
· From 1999 through 2017, a $100,000 portfolio of closed-end funds (CEFs) of income paying approximately 7% per year, compounded annually, would have increased invested principal to approximately $340,000 by the end of 2017. …a 240% gain on Equity and nearly three times the long-term average gain of the three stock averages!
· During the bleak decade itself, a $100,000 income CEF portfolio paying 7% and compounding annually would have increased investment capital by approximately 111% (10% annually).
Keep in mind that the average annual return of approximately 13% is based on annual rather than monthly reinvestment of earnings… so it would actually be even higher. Hmmm, kinda makes you wonder, doesn’t it?
Now some what if:
· What if you lived on income or portfolio growth at any time before mid-2010?
What if you were living on 4% of your portfolio’s “growth” or “total return” before the end of 1999? How much did he have left when he started the rally in 2010?
What if we don’t get enough more years of double-digit market growth for equity markets to catch up with the previous earnings illustration?
· What if the market does not produce a “total return” greater than your spending needs forever?
What if your portfolio contained enough income-earning securities to cover your expenses, combined with higher-quality equities than those contained in the Dow?
What if the stock market corrects again this year?