A Pep Talk for Income Investors
If you haven’t noticed, stock market greed is growing. According to the CNN Business Greed & Fear Index* last week we moved from greed to extreme greed. I’m not sure much matters after plain greedy, but extremely greedy on anybody’s index puts my ears up. The Greed & Fear Index monitors multiple indicators of stock market behavior including, but not limited to market momentum, stock price strength, market volatility and safe haven demand. This index is currently telling us what we already know. Things are getting a bit ridiculous.
At this recent fanatical level of avarice, growth investors have a tendency to lean into the momentum while those that have been hiding in cash muster up enough courage only to arrive late to the party. Both reasons why many investors can’t enjoy long-term investing success.
A personal favorite greed index of mine is how often we check our portfolios. Many investors become portfolio peeping Toms when the greed indicator is flashing. We lurk before, during and after-market hours to see a greener screen. We just can’t help ourselves; it feels good. Yet we know that any pleasure we have now will be short lived.
Interesting enough the opposite tends to be true when markets create fear. Investors tend to avert their eyes sometimes for weeks and even months. Losing money (even just on paper) is always more powerful than the joy of making money. We don’t want to know the bad news. But enough of fear, we can cover fear when it returns. Right now we have extreme greed to work through.
The recent momentum of the stock market has growth investors busting out of their buttons, feeling a bit like Buffet. But even growth investors should remember that if your screen is all green then something is wrong. Too much green can be a sign of future fear to come.
A well-balanced portfolio, even a growth portfolio should have some red on the screen. The best portfolios will have securities and sectors that will participate at their own time and for different reasons. These could be holdings that are more about income than price appreciation or non-U.S. stocks verses domestic stocks or smaller cap stocks. A diversified allocation of securities and sectors can be the belt to keep your portfolio pants up when markets get more skittish. The allocations that keep our portfolio disciplined and grounded. Too much green can mean your diversification is lean.
And now a pep talk for income investors
It’s pretty rough right now for investors that are seeking income. Your growth friends are not fun to be around the barbeque with their nose bleed A.I. stocks up 30% by the weekend trumping your 6% annual dividend increase. It’s tough to digest. But remember every ascent has its peak, so don’t lament in your lack of momentum. Growth isn’t your primary reason for being invested.
As an income investor you are seeking a different result. You had to turn the accumulation switch in your head to the off position some time ago. The risks of growth investing are now in your past and you need to be more concerned about the actual growth of your income. Your priorities along with growing income are; the proper sequence of distributions, and avoiding the use of principal whenever possible. Sure, not as sexy as those busty tech stocks but you are now in distribution mode for which there requires a certain demeanor and self-control. With the lack of your the weekly paycheck and time, your priority is tax efficiency over tech.
A portfolio that can generate enough growing income from dividends and interest can mitigate market risk. When we build income portfolios for clients this is what we strive for. Clients may give up some momentum growth, but now they are in a position to be less reliant on market appreciation. When markets retreat, it is comforting clients to know that they are not using principal for income (selling shares). The day to day value of the portfolio now becomes less important than the growing income being generated by it.
So, when your barbeque friend tells you of her latest tech triumph, just ask her to pass the relish and calmly say, “Yes, I remember when I used to care how well the market was doing.”
If you need a portfolio diversification checkup, or an income investing pep talk, gives us a call. Or just wait because this too shall pass and you will still have your dividends.
* CNN Business Fear & Greed Index: The Fear & Greed Index is a way to gauge stock market movements and whether stocks are fairly priced. The theory is based on the logic that excessive fear tends to drive down share prices, and too much greed tends to have the opposite effect. The Fear & Greed Index is a compilation of seven different indicators that measure some aspect of stock market behavior. They are market momentum, stock price strength, stock price breadth, put and call options, junk bond demand, market volatility, and safe haven demand. The index tracks how much these individual indicators deviate from their averages compared to how much they normally diverge. The index gives each indicator equal weighting in calculating a score from 0 to 100, with 100 representing maximum greediness and 0 signaling maximum fear.
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