“It’s good to learn from your mistakes. It’s better to learn from other
people’s mistakes” – Warren Buffett
We have a new year upon us. 2021 was interesting to say the least so let us look at what was bad.
• Inflation is estimated at 6.8% for 2021 and not getting better.
o New and used car sales saw a price increase of 38.7%
o Energy rose at 29.3%
o Core inflation, excluding food and autos rose at 5.5%
o This inflation amounts to a pay cut of 2.4% on average
o If you make less than the inflation rate on your investments, this is an invisible loss in your account
The typical experience is [that] inflation has likely taken a significant bite out of workers’ paychecks. – Daniel Zhao Senior Economist at Glassdoor
• Supply chain issues are causing empty shelves and long wait times for some retail items, both domestic and international.
o I tried to buy a new cowboy hat and was told at 2 separate retailers that new inventory was being delayed (Most cowboy hats are american made)
o This will cause people to stock up now being worried that shortages and high prices, may be a problem. This makes goods scarcer.
o Auto’s are in short supply
We are continuing to see shortages in job seekers as businesses struggle to find employees. This is causing wage inflation. Commodity prices (energy, food, metals [like copper used in home construction], lumber and more) can go up and down. Wage Inflation is sticky. Once payroll increases, it’s difficult to reduce.
Covid continues to mutate and cause problems despite the higher percentage of recovered and vaccinated people (New infections do seem to be less deadly)
• The market seems over valued with PE Ratios (common stock price measure) at
30.21. The average is at 15.96 (At Finasko.com, the last 40 years PE avg. is 21.92)
• Bond Yields are terrible as are CDs and other traditional fixed income
• Fed minutes indicate a change in interest rate policy, with Goldman Sachs predicting 4 rate increases for 2022. Rising rates destroy the value (or let’s call it resale price) of your bonds and can cause long term losses in bond funds. (We are predicting a blood bath for bond funds)
So, what is good?
• Stock Markets have been going up
• Congress is a total dysfunctional mess that did not raise taxes. We don’t like to be political; but we do not see tax increase happening in an election year
• It is a job seekers market with entry position and low-income wages, increasing
• The US Government and Federal Reserve has flooded the economy with money
• Consumer demand and business profitability remains strong
Why Consider A Dividend Portfolio Over a Bond Portfolio
If you said “I bought a car,” what would that mean? There are numerous vehicles you could have purchased (Maybe not numerous right now, due to shortages). Did you buy a sedan, sports car, mini-van, full size van, truck, luxury, electric and so on. The stock market is nearly as varied.
There are large company growth stocks (ex. Amazon, Google, and Apple), mid-size, small company, international, value and dividend stocks and that’s not all. Growth stocks as a class have done the well over that last 10 years.
Some are concerned that the stock market could reverse and cause losses. In past newsletters, we have shown the effect of volatility on your retirement.8 Dividend stocks can be less volatile than growth due to a cash dividend. But they do have risks, like price volatility and companies could cut the dividend. This is where diversification can reduce that risk.
Some investors may use the dividend as income while the value fluctuates with the rise fall of the markets. If your total return is higher than your distributed dividend over time, then you might see either a growing portfolio or rising income or both.
If you invest in the S&P 500 index ETF, the dividend is about 1.27%. That is why we manage a diversified portfolio of equity income investments (ETF’s, Stocks and other market investments.) Our target is 4%+ portfolio dividend. (Fiduciary Fee based Advisory Account)
A bond portfolio is safer from a default risk standpoint. If you have high quality bonds then default risk is low. The interest is also guaranteed (unless the issuer defaults). But bonds are sensitive to interest rate moves and their price (or resale price) will plumet when interest rates move up, which seems likely at this point.
“…if rates were to rise 1%, a bond or bond fund with a 5-year average duration would likely lose approximately 5% of its value.” -Fidelity Investments
So, your $100,000 is now at $95,000.00. Since interest rates are at all time lows will it bounce back? The individual bond will eventually mature at full value, but it’s likely the bond fund will not (See footnote 7, actually it’s a side note).
As I was writing this article, we saw major movements in the bond markets. The following is a quote from Gordon Scott at Investopedia.
“Bond fund prices fell significantly as interest rates rose to their highest level since the pandemic. As the Fed has tapered its open-market bond-buying, investment banks that sell those bonds have felt the pinch, leading stocks lower today. -January 18, 2022
The reason this whole issue is important is you can lose money, possibly a significant amount in bonds or bond funds when interest rates rise!
We believe that an equity income portfolio that is diversified and invested long term will do better in volatile or inflationary markets for an investor that can sustain the risk. There are other non-stock market options for principal protection we can consider.
Social Security Hacks
“In 2022, the most a person can receive in Social Security benefits each month is $4,194. This is a little over $50,000 per year…” – FL 1 News 01/12/2022
Small business owners shouldn’t try to avoid paying into SSA since benefits are based on the amount of lifetime social security taxes paid.
Sources Citations Bibliography:
⦁ The Balance. What is the current inflation rate? January 12, 2022
⦁ CNBC.com ‘Despite higher wages, inflation gave the average worker a 2.4% pay cut last year’
⦁ Investopedia.com ‘Guide to Inflation’
⦁ P/E Ratio is a financial metric that gives an idea about “what an investor is a ready pay to buy a share of a company based on earnings of the company. Finasko.com
⦁ https://www.multpl.com/s-p-500-pe-ratio
⦁ MSN.com Goldman predicts four fed rate hikes in 2022
⦁ Profitable News Why Bond Funds Are “Practically Guaranteed” to Lose Money. TheBalance.com “Are Bonds Safe? How Bond Funds Can Lose Money”
⦁ Call for a copy of the “The Real Cost of Volatility” at (888) 814-8559.
⦁ YCharts December 31, 2021
⦁ Fidelity Investments article; “Duration: Understanding the relationship between bond prices and interest rates”
Supplemental Disclaimers:
This article is informational only and is not investment advice. This is not an offer to buy, hold, or sell investments like securities or insurance products.
Securities and Investment Advisory Services are offered though Toro Bravo Investment Advisors, LLC. Life Insurance and Annuities sold as an insurance broker are not a fiduciary relationship and are not offered by Toro Bravo Investment Advisors, LLC.
Securities or Insurance are not FDIC/SIPC insured and investments contain risk plus could be subject to loss.
Losses could be short term or permanent. Numbers and figures illustrated are hypothetical in nature and past performance is not a guarantee or indication of future results/performance.
We are not affiliated with the Social Security Administration (SSA), Internal Revenue Service (IRS), or any Governmental Agency.
Do not rely solely on the Legal, Tax, or Financial information presented for it may not be suitable for your individual situation.
Consult your legal, tax, and/or financial professional before acting on any strategy or recommendation (i.e. major changes or before initiating the purchase, hold, or sale of any investment or investment strategy). Every individual’s strategy can differ depending on current circumstances and goals.