The swan is synonymous with beauty. We all love the fairytale about the ugly duckling who grows up to become a handsome swan. What might come as a surprise is that in addition to being an elegant waterfowl, a SWAN is an acronym whose components can help happy retirees Sleep Well At Night. More on that later.
I’ve had many conversations with nervous investors about what’s happening to interest rates amidst inflation. Folks are wondering what it all means for their 401(k) plans and other investment accounts. It would not be inaccurate to concede that it’s been a frustrating year for many. We recently hit bear market territory again as the S&P 500 dipped more than 20 percent.
Added to anxieties has been the Federal Reserve’s (the Fed) penchant for raising interest rates, which they recently did again. The other day I was on the air with a popular Atlanta radio personality who was incensed about the move, claiming the Fed was out of its depth. I didn’t quite agree, but I did empathize.
The worst-kept secret on the planet is that the Fed has been behind the curve on inflation. They’ve even come close to admitting it. The problem isn’t a lack of awareness but an inability to find a perfect solution. Unfortunately, one of the only tools at the disposal of Fed chairman Jerome Powell is raising interest rates, which comes with a certain amount of economic pain—in general, the markets don’t like it. The day they announced the most recent hike of 0.75%, the Dow Jones Index fell five hundred points.
In turbulent times many people forget about the steadiness of income investing, so let’s use a hypothetical to trigger our memory. Imagine you have $1 million. If your overall portfolio has a cash flow yield of 4 percent, you’ll receive $40,000 in dividends and/or interest per year. Cash flow is real. So, keep that income in mind and let it counterbalance the anxiety of a fluctuating market.
Anxiety comes hard and fast during challenging times, so my team and I devised some ways to fight it. I teach my clients three powerful keys to help them SWAN—Sleep Well At Night.
1. The Power of a Plan. If you don’t know what you want to do, you’ll never do anything.
2. The Power of Understanding Cash Flow. Your steady portfolio cash flow comes from reliable, value-oriented companies that pay dividends regardless of turbulent markets.
3. The Power of Diversification. Diversify your portfolio by utilizing Exchange Traded Funds (ETF’s) that can hold between 100 and 250 stocks, alleviating the worry of one company falling apart. That many companies shouldn’t crumble unless the world ends. Spoiler alert: we do not believe the world is ending any time soon.
Regrettably, the Fed has confessed that it will eventually dole out more pain. Interest rates should continue to rise. Despite the transparency, the markets still can’t quite digest the problem fast enough, and the negative fallout inevitably makes a lot of shareholders, retired or otherwise, skittish.
Despite the unrest, there is a silver lining. As interest rates ascend, so do the payout of bonds. In other words, the bad news is that interest rates are up, and the good news is that interest rates are up.
To be clear, I’m still a proponent of dividend-paying equities over bonds as I believe it is a way to protect your purchasing power. Typically, dividend rates stay ahead of inflation. That means your principal and cash flow accumulate over time, as long as you own perennial dividend-paying companies.
Let’s say that a year ago, you moved $1,000,000 from equities into a 2 Year Treasury bond because you didn’t like the trends you saw. That would’ve earned you about $27,000 in interest (2-Year U.S. Treasury yield was .27% in September 2021). Today (as of September 2022), with the U.S. Treasury paying 4%, that figure sits closer to $40,000 per year! You have more opportunities to generate income from bonds than we’ve seen in over fifteen years.
The bottom line is that it’s been rough out there for many people. You’d have to go back to 1937 to find a worse year for a fifty percent stock/fifty percent bond portfolio. Try to remember that total return equals growth plus income. Just because your growth stocks aren’t steady doesn’t mean your value stocks won’t be. That’s why it’s critical to stay diversified.
Though it doesn’t seem like it, history shows that in general the U.S. market goes up more than it goes down, and over time the income generated through a diversified portfolio should remain consistent. The interest paid on bonds should stay constant when markets go down. Likewise, dividend-paying stocks tend to continue paying similar amounts if you’re invested in solid quality, value-oriented companies.
You can’t control inflation or interest rates, but you can manage your anxiety. If you remember the power of SWAN and the keys to help you get there, you increase your chances of finding happiness in retirement.
This is provided as a resource for informational purposes and is not to be viewed as investment advice or recommendations. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. The mention of any company is provided to you for informational purposes and as an example only and is not to be considered investment advice or recommendation or an endorsement of any particular company. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal. There is no guarantee offered that investment return, yield, or performance will be achieved. The information provided is strictly an opinion and for informational purposes only and it is not known whether the strategies will be successful. Investment decisions should not be made solely based on information contained herein. There are many aspects and criteria that must be examined and considered before investing. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax, or investment advisor before making any investment/tax/estate/financial planning considerations or decisions. The views and opinions expressed are for educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions.