Perhaps you’ve heard folks in South Walton say they are “battle tested” after surviving another hurricane season. I would call myself “recession tested.”
I graduated from college in a recessionary period. And now, after living here for 26 years and after 17 years in the investment advisory industry, I have shepherded client accounts through two more subsequent recessions, the dot.com bubble and the economic fallout of the attacks on the World Trade Center, and through the most recent financial meltdown of 2008.
Many years ago, sometime during the dot.com bubble, it occurred to me that folks who were invested in broad indices were not making sustained, incremental portfolio progress over time. New clients would bring account histories, which showed a 28 percent gain one year, then a 32 percent loss the next. I began to study longer S&P 500 trends, and found several periods of 20 years plus when the index was virtually flat, with no gains for retirees.
For instance, if you retired in Santa Rosa Beach in 1966 and had your money invested in a broad S&P index fund, by 1982 you would have earned exactly 0.0 percent, including dividends (Ibbotson Annual Yearbook). If you worked your entire life and retired, thinking you were on Easy Street, then for 16 years made virtually nothing on your investments, you’d be more than a little disappointed.
As economist David Rosenberg wrote last January, “The era of strict capital appreciation strategies had a nice secular run, from 1982 to 2000. But the boomers were in their 20s and 30s and had time on their side,” says Rosenberg, “not to mention risk tolerance given their age. That was then, this is now, and the boomers are heading into their 60s and their risk profile has changed with their age profile … After being burned twice in seven years by two bubbles bursting, forgive this group for wanting to play it safe.”
So I made the intuitive decision on behalf of many of our clients, most of whom were nearing or at retirement, that they must get paid from their investments. I knew that I couldn’t control the investment world, but reasoned that if I invested appropriate client portfolio assets in the stocks of well-established companies that paid dividends and bonds that paid coupons, our clients could receive systematic, periodic income from their investments.
For those clients who needed or desired this additional income, and many did, it was a great source of financial assistance and comfort.
Of course, I was looking for securities that enjoyed capital appreciation as well as ones that paid dividends and which increased their dividend payouts over time. They’re out there, but you can’t get them by buying a broad S&P index fund, because you have to take the laggards with the leaders in that “set it and forget” style of investing.
A more successful strategy requires that you maintain a global perspective, utilize multiple analysis tools, and carefully select securities that are risk appropriate for your clients’ portfolios. And then monitor their performance. And, when certain sectors in the market appear headed for a downturn, you want to get out before the serious slide occurs. For example, that was the case with European developed markets in late 2011.
There are a variety of risks involved in any type of investing, including political, interest rate and market risk. But for the Baby Boomer generation, these pale in comparison with longevity risk, or the possibility that we will outlive our money.
Being older and broke isn’t on anyone’s wish list.
Margaret R. McDowell, a chartered financial consultant and accredited investment fiduciary, is the founder of Arbor Wealth Management, LLC, (850-608-612, www.arborwealth.net), a fee-only registered investment advisory firm located near Sandestin.