A Reader Asks, I Answer

A reader asks; The comment stream is asking you to elaborate as to that portion of your statement wherein you said owning ‘dividend growers exclusively’ is risky or not advisable…exactly what are the dangers of having an income stream as a primary goal instead of capital appreciation? My answer; I have tried to address this before. This is in part a philosophical issue. My first hand experience with capital markets goes back to 1984 (worked in the industry for a year before starting college) and I have tried to learn about stock market history from before 1984. In my time I have seen plenty of things that could never blowup or otherwise hurt people in fact go on to blowup and otherwise hurt people. I believe you are around 70 but I do not know how long you have been a market participant but you have probably seen more of this first hand than I have. For whatever reason I have a pretty good memory for how the psychology around these things has worked and I believe I see a lot of the same behavior repeating in many of the comments. It may be difficult to believe but the can’t go wrong idea was also applied to the Nifty 50 and Junk Bonds–yes, you can say it was different for this or that but the behavior is not different. In the 1990s Fannie and Freddie were must holds because of how incredibly safe they were. It is simply a matter of philosophy based on personal observation that too much of anything, ANYTHING, increases the risk taken. The debate that...

A Reader Asks, I Answer

A reader asks; The comment stream is asking you to elaborate as to that portion of your statement wherein you said owning ‘dividend growers exclusively’ is risky or not advisable…exactly what are the dangers of having an income stream as a primary goal instead of capital appreciation? My answer; I have tried to address this before. This is in part a philosophical issue. My first hand experience with capital markets goes back to 1984 (worked in the industry for a year before starting college) and I have tried to learn about stock market history from before 1984. In my time I have seen plenty of things that could never blowup or otherwise hurt people in fact go on to blowup and otherwise hurt people. I believe you are around 70 but I do not know how long you have been a market participant but you have probably seen more of this first hand than I have. For whatever reason I have a pretty good memory for how the psychology around these things has worked and I believe I see a lot of the same behavior repeating in many of the comments. It may be difficult to believe but the can’t go wrong idea was also applied to the Nifty 50 and Junk Bonds–yes, you can say it was different for this or that but the behavior is not different. In the 1990s Fannie and Freddie were must holds because of how incredibly safe they were. It is simply a matter of philosophy based on personal observation that too much of anything, ANYTHING, increases the risk taken. The debate that...

More On “Just Don’t Lose It”

I wanted to delve a little further into the Just Don’t Lose It cover story from this week’s Barron’s. The article included some sort of model portfolio that US Trust is apparently recommending to its clients. There were a couple of different things in there so this will focus on the “long term benchmark” which was as follows; Cash 0%US Large Cap 16%US Mid Cap 7%US Small Cap 4%Developed Foreign 9%Emerging Market 6%US Investment Grade Debt 25%Foreign Developed 2%US High Yield 3%Hedge Fund 12%Private Equity 4%Real Estate 6%Tangible Assets 6% Again the above is put forth by US Trust not me or my firm. First is that there are a couple of things I would do differently. The way the numbers work out, US Trust is suggesting a little over 1/3 of the equity allocation go into foreign. In thinking about the long term and how things are evolving I would want more exposure to foreign equities (we have more exposure than this) and I would reiterate that the terms developed and emerging have become meaningless as many so called developed nations have banana republic-like debt loads. I would also want more foreign exposure in the fixed income allocation, without going nuts. Some foreign exposure can help increase the yield of the portfolio. We love Aussie debt but we have a small allocation which does help the yield but we do not own so much that we are chasing yield. While I do not think the US Trust portfolio does chase yield, a lot of investors do and this usually ends badly for not having understood the risk taken...

More On "Just Don’t Lose It"

I wanted to delve a little further into the Just Don’t Lose It cover story from this week’s Barron’s. The article included some sort of model portfolio that US Trust is apparently recommending to its clients. There were a couple of different things in there so this will focus on the “long term benchmark” which was as follows; Cash 0%US Large Cap 16%US Mid Cap 7%US Small Cap 4%Developed Foreign 9%Emerging Market 6%US Investment Grade Debt 25%Foreign Developed 2%US High Yield 3%Hedge Fund 12%Private Equity 4%Real Estate 6%Tangible Assets 6% Again the above is put forth by US Trust not me or my firm. First is that there are a couple of things I would do differently. The way the numbers work out, US Trust is suggesting a little over 1/3 of the equity allocation go into foreign. In thinking about the long term and how things are evolving I would want more exposure to foreign equities (we have more exposure than this) and I would reiterate that the terms developed and emerging have become meaningless as many so called developed nations have banana republic-like debt loads. I would also want more foreign exposure in the fixed income allocation, without going nuts. Some foreign exposure can help increase the yield of the portfolio. We love Aussie debt but we have a small allocation which does help the yield but we do not own so much that we are chasing yield. While I do not think the US Trust portfolio does chase yield, a lot of investors do and this usually ends badly for not having understood the risk taken...

Sunday Morning Coffee

The Barron’s cover story was titled Just Don’t Lose It and it tried to explore the extent to which investor psychology has shifted to being more skeptical or distrusting and the article also tried to offer some solutions. Candidly the article was a little thin but the questions raised are interesting as is the pursuit for a solution. There was an interesting stat about how many Gen Ys don’t trust stocks and so have a high portion in cash. Also mentioned was how well dividend payers did in 2011 which is supporting evidence of people eschewing growth in favor of something more predictable; the dividends. My take on these issues has been the same for a while. I do believe stocks and markets still work but there has been an evolution. Plenty of markets and plenty of individual stocks have carried on even as the SPX has floundered and there will continue to be plenty of markets and individual stocks that carry on if the SPX continues to flounder. Certainly this means the task is more difficult and it is reasonable that people don’t want to spend more time on their savings and their investing than they used to but success probably means just that; spending more time than they did 15 years ago. Fortunately the tradeoff is very simple to understand even if not easy to pull off. If 2-3% annually is a more likely outcome then more needs to be saved or you need to work longer or spend less or any combo of the three. As far as the actual title of the article; people feel...