“Compound Interest is the 8th Wonder of the World, he who understands it, earns it….. he who doesn’t pays it” (Albert Einstein)
🔵 January 2021 has been and (almost) gone, with the month generally finishing near where it started thanks to a bit of a sell off in the last week …Emerging Markets being the exception with a nice improvement …data being….
S&P 500 -1.1%
MSCI W -1.1%
🔵 With Currencies, the USD is seen as relatively weak with mixed results versus major currencies but no major moves….
CNY -1.5% –
🔵 So what to take from the last month? With gains from 2020 continuing for much of the first 3 weeks of the new year, only to be given back during the last few trading sessions in developed markets.
🔵 So does this mean the start of a correction? There is an apparent disconnect between the state of the functioning economy with all the Covid restrictions in place, and the value of the stock market which has been on a great run. To suggest though that this means we are certainly heading for a correction or some kind of crash is misguided.
🔵 No one knows. As mentioned in last month’s report, one thing about 2021 is that there is more certainty in the air than there was in 2020 (Covid vaccine, US president decided, Brexit finally getting somewhere etc etc). Markets like certainty. That said profit taking will have its impact and seeing a 5 – 10% correction is not out of the realms of possibility.
🔵 A 10% fall in the value of a portfolio can be very stressful for some, almost irrelevant for others and perhaps good news and a great buying opportunity for a few. This is where ensuring you get the correct advice for your personal situation is vital as ups and downs are part of any portfolio performance and above all your time horizon needs to be considered. No one wants 100% equity portfolio 6 months before retirement and we get a 15% market correction.
🔵 The strategy of all time great investment brains, Buffet, Munger, Graham , Lynch et al , follows the same pattern in that being invested in good areas for the long term is where you get success. Being patient, staying invested and utilising strategies such as Dollar Cost Averaging over time is what works. Buying good companies or good funds which own good companies works. After all, the aforementioned legends made trillions of dollars for their clients as well as themselves, proving it works
🔵 So keeping with this philosophy of remaining invested and regularly investing over time , where do you place your hard earned money when prices seem a bit high.
🔵 One area to consider is the “Dividend Aristocrats” These are companies who have increased their dividend year on year for more than 25 years, some considerably more. As I say again and again, although nothing can be certain and predicting is futile, advising that a company that has increased it’s dividend for 58 years in a row is likely to increase it’s dividend in the 59th year is one of the few predictions I am willing to make.
🔵 Coca Cola has indeed increased it’s dividend every year for the last 58 years, currently paying 3.4%. Other great companies who are 50 year + include Johnson and Johnson , 3M , Proctor and Gamble to name but a few.
🔵 With interest earned from bank accounts a thing of the past and the corporate bond market a minefield for retail investor, the idea of using equity investing for income has become its own strategy. If a 10 year fixed account paying 4% a year was offered, most would see this as a reasonable return (and about 3.5% better than any bank account would pay). Given the above facts on Coca Cola dividends, over the next 10 years an average dividend of 4% would be achievable. If the share performs the same in the next ten years as it did the last, as well as the 40% income, the capital gain of 54% would be gravy.
🔵 Of course despite its robustness, putting all your eggs in one basket with a company like Coca Cola is not suitable. Rather a collection of these aristocrats in a well managed fund would be the choice. Also using a fund which reinvests dividend means you benefit from the “Eighth Wonder of the Word” …..
🔵 US$100,000 invested at 4% which compounds returns $148k over 10 years and $219k over 20 years. The latter illustrating how a return increases from 4% to just shy of 6% per annum and prompting Albert to come up with one of his many great thoughts…….