Now that we have started the 2019 fourth quarter, my
thoughts have turned to the new year and new decade starting in 2020. The
current stock market bull market started a decade ago (in March 2009) and the
average return for the last 10 years has been 40% above the long term average. Investors
who believe the stock and bond bull markets of the previous 10 years will
continue into the next decade may be deluding themselves.
I am most worried about those who have most of their
retirement wealth tied up in an IRA or 401(k), invested in exchange traded
funds (ETFs) because they are low costs. I think there is a strong
possibility for this strategy to also be low returns over the next decade.
Lets discuss a few points that may have investors overconfident about their
portfolios in the 2020s.
As of August 31, the average annualized return for the SPDR
S&P 500 ETF (SPY) for the last 10 years was 13.29%. Thats from the bottom
of the last bear market to what is currently a market near record highs. Thats
a compounding return, so money invested in SPY in mid-2009 has more than
tripled in value.
That 13.29% average is 40% higher than SPYs average annual
return of 9.44% since it launched in 1994. A reversion to the mean over the
next decade to get the 20-year return back to average would require low single
digit returns through the 2020s. More importantly I have read a number of studies
that when the market is starting from a near record level the returns going
forward have been much lower than the long term averages.
The low stock market return years may already have started.
Look at the 10-year chart for the SPY and you will see the ETFs value has
grown very little since the start of 2018. Since that peak in January 2018, the
SPY share price is up just 4%. You can add in a couple percent per year from
My point is, think about how you will reach your investment
goals if the next decade has stock market returns on average of 2% to 4%?
Bond investing looks even more problematic than the stock
The 2019 drop in interest rates has produced a bull market
for bond prices. The problem is that yields dont have much room left to fall
and plenty of headroom to go higher. Rising rates means falling bond prices and
declining bond fund share prices. If you look at the longer term, a bond fund
will end up with average returns close to the prevailing yield when the shares
For example, the Vanguard Total Bond Market ETF (BND) has
returned 10.42% over the last year (through 9/30/19) but has a 10-year average
return of 3.65%. With current bond yields on average currently right at 2%, I
would not expect a bond fund to do much better than 2% a year for the next
To me this information about the stock and bond markets is
scary stuff and I work for and with my subscribers to develop investment plans
that should generate cash yields and income and not be dependent on capital
appreciation to hit their 2030 investment goals. It is possible to generate 6%
income yields or higher (a lot higher with some strategies), but you wont find
those yields in the world of low cost ETFs and index funds.
In my Dividend
Hunter service, I have a recommended list of conservative dividend stocks
with an average yield of 6.5%. I also give out a list of high yield stocks,
with a double digit average yield and provide some fixed income investments
that yield a lot more than the 2% you would get from a fund like BND.
Here are a couple of investment ideas that illustrate how
much better you can do with an income focused strategy.
The Reaves Utility Income Fund (UTG) is a utilities
and infrastructure closed-end fund that has paid a dividend every month since
it launched in 2004 and has steadily increased the monthly rate.
currently yield right at 6.0%.
REIT Preferred ETF (PFFR) is an actively managed ETF that owns preferred
stock shares issued by companies organized as real estate investment trusts
This fund is more
conservative than the broader preferred stock universe, which is more
conservative than dividend paying common stocks.
PFFR pays monthly dividends and yields 5.7%.
Retire on far less than you think [sponsor]
Do you need $5 million to retire? $1 million? How about just $25,000. Because thats all you need to create tens of thousands in income every single year for life. View the full details for free before we take this urgent information down. Click here now.