FYI | May 18 2016
By Peter Switzer, Switzer Super Report
Until last week, I was getting a little worried about the US economy but this week, the focus will be back on China again, with some worse-than-expected economic data. This will stress out economists and optimists but I suspect this week pessimists and short sellers will be off to a bear’s picnic, though, in all reality, you shouldn’t care either way, if you’ve created the right portfolio of assets.
Initially I was going to talk to you about how for three weeks in a row the Dow had finished in the red and this hadn’t happened since January! Worse still, the Dow and the S&P 500 are under their 50-day moving average, which is never a great omen for the market.
However, the negativity on Friday on Wall Street was for positive reasons. Those retail numbers in the US, which were up 1.3% in April against a Reuter’s survey of 0.8%, were miles better than expected. It has put a June rate rise back on the table, just when most experts were tipping September for the next rate rise, despite this being the scariest month of all for US stocks!
And on the local front, we’re running up against a few obstacles. "There's a key resistance band between 5305 and 5385 points, that's looking at the previous highs over the last nine months," James Woods, the global investment analyst at Rivkin Securities told the Sydney Morning Herald.
"The momentum indicators are highly overbought and it signals there is an increasing risk of a pullback. The market is struggling to break higher and so this recent rally looks exhausted. From here, we expect some corrective declines."
And along comes China’s ordinary numbers, which were retail sales up 10.1% in the year to April (against a forecast of 10.5%, production up by 6% (versus a forecast 6.5%) and investment rose by 10.5% in the four months to April on a year ago (but the forecast was 10.9%). Small misses will still give the market reasons to sell off but I have to admit I am saying to myself: “So what?”
This day-to-day stressing about indicators that have no real trend, and if they do it’s not a significant trend, are what short-term players or traders make their money or lose their money on. For the long-term investor, it really shouldn’t matter. But unfortunately for some, it does. We can’t control the ups and downs of the market but we should be able to do a great job in getting 5% in dividends and nearly 1-2% in franking credits, so we get 6-7% per annum no matter what happens to our capital.
In a perfect world, we should have created a portfolio of assets that will consistently return around 7%. If you had a disciplined approach to buying stocks in severe market downturns and when there have been dips like the one we saw between January and mid-February, then your yields from dividend-stocks could even be higher than 7%.
For example, on 23 January 2009, only about 50 days before the GFC crash turned into a screaming buy, the CBA share price went as low as $23.90. If you had bought shares then on current dividends, you’d be on a 17% yield before franking!
In an era where term deposits will be low for a long time, you need to be a great yield chaser. If I was going to create a perfect fund, it would be one where the principles would be that I buy the best quality dividend-paying stocks, especially when markets are low so I can push up my yield. This would provide the base and then growth would be the cream on the cake. Even if the growth was not spectacular, it would imply a return of over 10% per annum over a 10-year period, which is pretty damn good, no, great!
Then as markets do as markets do — go up and go down — my capital would be at the mercy of the cycle but my income dividends would be constantly delivering. And if I bought astutely when markets were negative, then I’d be building up that income stream.
Why didn’t people tell us this when we were younger? Firstly, because a lot of smart people still haven’t worked this out. Secondly, some smart people were saying this stuff but we were reading and thinking about less important stuff. The fact you are reading this shows how you’re now positioned to get this investing caper right.
The real moneymakers of the world are in a small minority and that’s because they act differently from the majority. They know that Warren Buffett has nailed it when he says “be greedy when others are fearful and be fearful when others are greedy” and the like.
There’s nothing wrong say allocating 10% of your portfolio to trading to try for alpha returns and a bit of adrenalin-lifting fun but your core portfolio needs to be beta with a kick. The best and most reliable way of getting this oomph is to shoot for great dividends in great companies, which over the course of a stock market cycle will also deliver growth.
Dividends plus growth is an investor’s nirvana!
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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