Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.
Are you suffering from financial crisis fatigue? If so, that’s understandable. Over the past decade, we’ve watched any number of highly touted investment vehicles soar to breathtaking heights before crashing to earth like a scorched piece of space junk.
Some of the most spectacular flame-outs since the year 2000:
And the potential hits just keep on comin’. Gold dropped sharply last week. Bonds are also vulnerable, as prices have surged and interest rates (which move inversely to prices) have dropped to levels not seen since the 1940s.
So how do you make significant progress toward your investment goals without getting caught up in the boom-bust cycle?
Create a balanced, diversified portfolio that consists of various categories of investments, each of which serves a different role in insuring your financial present and future. I call this the “Bucket Approach.”
As you fill your buckets, focus on investments that pay dividends. Income from your investments will provide a cushion in difficult times and add to your total return in good times. Your income should flow from three places: dividends from stocks, interest from bonds and distributions from closed-end funds, royalty trusts, and MLPs.
Let me give you an example of the power of dividend re-investment. In the last 14 years the S&P 500 has experienced three major dips and two major “up” cycles. The result: a net 6 percent cumulative return, or about .5 percent per year — not including dividends.
However, an investor who stayed in the market that entire time and reinvested his dividends would have realized a 36 percent cumulative return, or a little more than 2.5 percent per year.
2.5 percent isn’t an earth-shattering return, but these numbers illustrate the importance of keeping your chips on the table and in the game.
In difficult market times I find it helpful to listen to what John Bogle is saying (Bogle is the 82-year-old founder of the Vanguard Mutual Fund Group). His most recent thoughts are that it is “insane” to think we will see double-digit stock market gains like we saw in the 1980s and ’90s, but over the next decade it is “likely” to see the market generate an average annual return (including dividends) of about 7 percent.
Remember the rule of 72? Take your expected rate of return (7 percent in this example) and divide it into 72 to find out how long it would take your money to double. In this case 72 divided by 7 means it would only take 10.3 years for your money to double.
So press on. Slow and steady wins the race.
What are your thoughts on the next bubble to pop?
– By Wes Moss, for Atlanta Bargain Hunter