Weathering Market Storms

The Importance of Weathering Market Storms

As much as any time in history, having a workable strategy in place to weather temporary market storms like the Covid-19 crash we experienced earlier this year is critical to your financial future. 

Take a moment to think about this:  The yield on the 30-year U.S. Treasury bond is 1.564% as I write this.  By contrast, according to Bloomberg estimates, total dividend payments from companies in the S&P 500 Index will be $59.41 per share in 2020, up from $58.69 in 2019.  With the current price of the S&P 500 hovering around 3,500 right now, that means the dividend yield on the S&P 500 Index is 1.7%.

In short, the dividend yield of the five hundred largest businesses in the United States is currently greater than the yield on the 30-year U.S. Treasury.  That is remarkable!


There are several key takeaways from this for those confronted with battling rising lifestyle costs for the duration of their lives without depending on a paycheck from work, i.e. our Relaxing Retirement members!  For quick reference, at only 3% historical inflation, a $10,000 per month lifestyle today will require $17,500 per month in 20 years (the average joint life expectancy of a 72 year old couple) to support the same lifestyle, and $23,500 per month in 30 years (the joint life expectancy of a 62 year old couple).

As we examine the current landscape for solutions to this problem, think about the long-term prospects for purchasing a 30-year treasury bond today for $100,000 as a potential option.  You would receive the 1.564% yield each year you held it (or $1,564).  Assuming you held it until maturity, you would receive your $100,000 in return in 30 years.  That is the promise the U.S. government makes (or any entity issuing a bond).  You will not receive anything less than your $100,000 you loaned them, but you won’t receive any more either. 

There are multiple headwinds to solving your long-term purchasing power problem with the “fixed” treasury bond solution:

  • The Fed has a stated policy target of 2% inflation per year.  After paying taxes on the 1.564% yield on a “safe” treasury bill, your after-tax return of a little over 1% would be half of the rate of inflation.  In other words, if your desired lifestyle costs $100,000 this year, you will need $102,000 next year to pay for the exact same lifestyle.  However, you would only have about $101,000 to support it.
  • Assuming inflation only creeps up by the Fed’s stated target of 2% per year, you would need $104,040 in year two to support the same lifestyle.  However, unless your other income sources had a cost of living raise built into them, your income would remain at about $101,000 because the interest on your treasury bond is fixed. 
  • Taking this out only 10 years, you would need $119,509 of income to pay for the same lifestyle as today with about $101,000 to support it.  Remember that this assumes inflation is only 2% per year!
  • If inflation mirrors the last 30 years over the next 30, i.e. 2.9% per year according to Ibbotson, the purchasing power of the $100,000 treasury bond you bought would be about $40,000 in year 30, or a loss of purchasing power of 60%!

While the past is no guarantee of the future, as an alternative solution to this purchasing power dilemma, let’s now look at simply owning a S&P 500 Index fund with the same $100,000 over the last 30 years, not as an endorsement of owning just the Index, but to illustrate broad market forces.  For this exercise, we won’t even consider the drivers of higher expected returns.  

In 1990, the Index closed at 330.22 and paid dividends of $12.09 per share.  At the end of this past year (30 years later), the index closed at 3,230.78, up just shy of ten times in value.  Without taking dividends into account, this means the $100,000 investment grew in value to just shy of $1 million. 

With the dividend of $58.69 per share in 2019, that means the dividend also increased almost five times, far outpacing the rate of inflation which went up slightly less than two times over the same 30 years.

What’s critically important to note is that, during this same 30 year period, we all experienced two of the worst bear markets in history with a 49% drop in market prices during the crash in 2000-2002, and a whopping 57% drop during the great recession in 2007-2009.  The substantial, inflation-fighting growth in value and dividends noted above occurred in spite of these historic market crashes. 

All of this highlights how vital it is to your financial independence to have a workable strategy in place to weather all normal and temporary market storms, and maintain ownership of strategically diversified stock index funds with a sizable percentage of your Retirement Bucket™.      

This is why we strongly recommend holding about five years’ worth of your anticipated withdrawals away from the short-term volatility of stocks in money markets and short term fixed income instruments, and allowing all dividends to flow into your money market to buy you even more time.  This allows you to remain confident and maintain ownership during all cycles knowing that you won’t have to sell in a down market and realize a loss to support your cash flow needs.

We’re all in a battle to maintain purchasing power in a rising cost world so we can continue to live the lives we’ve earned.  The question to ponder is what will be your primary weapon to win this battle?

I think you already know what vote I’d cast!  

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