No one would deny that 2017 was a banner year for the markets...at year end, all the equity indices were close to their all time highs. Even the WSMSI (Working Capital Model Select Income Index) had a capital growth number approaching 12%.
But, lets step around Wall Street's promotional pennants, and look at the numbers over the long term, say this century so far...
You'll recall that the period from 1999 through 2009 was dubbed "The Dismal Decade" by a Wall Street that just couldn't cope with the idea that the "shock market" (collectively) could actually go backwards over such a long period of time.
Has the "bull market" that evolved from the dismal decade really produced the type of gains you've been hearing about?
• From 1999 through 2009, the NASDAQ (home of "FANG" type companies since forever) shrunk by a whopping 34%. From 1999 through 2017, it was the worst performing of all the indices, rising just 71%, or an average of less than 3% compounded, per year. So even the spectacular 160% market value gain since 2009 hasn't produced spectacular long term performance.
• From 1999 through 2009, the S & P 500 (although less speculative than the NASDAQ overall) lost a scary 39% of its value. Recovering more quickly than the NASDAQ, the S & P has gained approximately 94% in market value over the past 18 years, or an average of less than 4% compounded, annually. So not so much to celebrate in the S & P either... for the long term investor.
• From 1999 through 2017, the higher quality content DJIA suffered less than the other indices through the dismal decade, losing less than 1% per year, on average. But its 18 year, overall performance, of 115% market value growth was an average of less than 5% per year . Reflective of higher quality content, yes, but really not so impressive overall.
So what about an income purpose investing approach during the same two time periods?
• From 1999 through 2017, a $100,000 portfolio of income Closed End Funds (CEFs) paying roughly 7% per year, compounded annually, would have grown the invested capital to roughly $340,000 by the end of 2017... a 240% gain in Working Capital, and nearly three times the average long term gain of the three equity averages!
• During the dismal decade itself, a $100,000 portfolio of income CEFs paying 7%, and compounded annually, would have grown the investment capital by roughly 111% (10% annually).
• Note that the average annual gain of roughly 13% is based on annual rather than monthly reinvestment of earnings.... so it would actually be even higher. Hmmm, kinda makes you wonder, doesn't it?
Now some what ifs:
• What if you were living on the income or growth of your portfolio at any time before mid-2010?
• What if you were living on 4% of your portfolio "growth" or "total return" prior to the end of 1999, how much did you have left when the rally began in 2010?
• What if we don't get enough more years of double digit market growth for the equity markets to catch up with the income illustration above?
• What if the market doesn't produce "total return" greater than your expenditure needs forever?
• What if your portfolio contained enough income purpose securities to provide for your expenditures, combined with equity securities of a quality superior to those contained in the Dow?
• What if the stock market corrects again this year?