Making investment allocation choices reminds me of a conversation that I almost had with my teenage son. Last week, my 14-year-old son came downstairs and said to me “I’m out of shirts for school.” Well, actually, that’s what he would have said if he really spoke to me, but he’s a teenage boy, and I will pretend that we had this dialog, even though he doesn’t actually speak in the morning.
“Dad, I’m out of clean shirts. I don’t have anything to wear for school.” He then proceeded to go over to the laundry basket and say, “oh, there’s the laundry,” and he proceeds to pick out a shirt, and he says “this shirt isn’t that dirty. I’ll just wear this,” and puts it on, and says “I’m ready for school.” Of course, it makes you wonder how dirty the other shirts are.
In looking at the economy overall, we see “dirty shirts” everywhere. I think of the world economy as that laundry basket full of dirty clothes, and I think of the clean or semi-clean shirts in the laundry basket represent the US stock market.
When my son selected the semi-clean shirt, I imagined my clients investing in the US market and getting the best of the worst. Sometimes, that is all we can hope for in investing.
Currently, we are not in a bear market. We’re still in a secular bull market. As the market goes up and down… mostly down this year, it looks like the US is still a safe haven for the world.The big question is how will the volatility of the market affect our intention of long-term investing?
We all agree that in order to make money, you have to beat inflation. Inflation historically has been around 2% and continues to show signs of staying at that level regardless, of what the Federal Reserve Chairman Yellen says.
As inflation continues at 2%, we need to make at least that much on our money; plus we want some growth for our longer-term dollars. In order to decide where to place your assets to invest, it is always best to diversify your portfolio. But, how can you be diversified, when the areas of diversification are very dirty, similar to those dirty shirts in the basket, and the only somewhat clean place is the US economy?
Can you receive enough diversification by just investing in the US market, rather than the rest of the world? Certainly last year, 2015, shows that the stock market overall was down slightly, but international market (adjusted for currency risk) was down double digits.
Last year, this analogy would make sense for certain select stocks, such as the S&P falling down roughly 2% last year or even just cash which was flat. This year, the stock market is very volatile; however, we do have something on our side, which is the fundamental of investing long-term.
As an aside, what is wrong with the world except for the US? The main problems are the Chinese stock market, currency issues and oil prices. The US stock market, on the other hand, and the companies it represents, have not stopped…they’ve just slowed down. The growth that we should expect may not be as high as in the past, but should still continue as long as we believe that we are still in a bull market.
In picking investments, it is always best to look towards things that are US-based, such as dividend-paying stocks. This year, 2016, a well-balanced dividend portfolio should have been flat compared to the S&P down roughly 6% (at of the time of this article). This portfolio usually weathers storms nicely and can focus primarily on dividends with some potential growth.
This portfolio will not have the same volatility of a non-dividend portfolio, such as the S&P 500.
This is an example of how sometimes an index or an exchange trade fund (ETF) representing the index will under-perform a specialized institutional manager.
What type of companies should be included in a high dividend portfolio is a topic for another time.
To help you find the right dividend paying stocks, I created a special page on my website http://blattfg.com/blog/dividend-stock/
Picking the right portfolio, and specifically, the right US-based portfolio, is important because you don’t want to have a laundry basket full of dirty shirts.
Remember, plan today… protect tomorrow.
Until Next Time.
Peter Blatt is the president at Blatt Financial Group. He has more than 17 years’ experience in the financial industry. He received a bachelor’s degree in accounting from Boston University, a law degree and a post doctorate degree in tax from the University of Miami School of Law. Peter formerly ran the financial planning department of a Trust Company in Palm Beach. He is an active member of the Florida Bar Association, the Palm Beach County Bar Association and the former secretary of the Tax Section of the Florida Bar. He is the founder of the North County Advisor’s Council. He has been published or quoted in numerous periodicals including The Wall Street Journal, Yahoo Finance, SUCCESS Magazine and on Fox Business News.