Time for a Heart-to-Heart

Streetwise for Friday, December 1, 2017

In the past, I have been a strong proponent of the idea that you need to have a “heart-to-heart” with your portfolio as we go into the last month of the year. The key reason is that at the close of any year, a little “tuning up” is probably in order.

If you maintained a portfolio throughout 2017, you should take a moment to congratulate yourself on your forward thinking and your fortitude in ignoring the prognosticators of doom. Your reward is that the S&P 500 is currently up about 15 percent. Hopefully your returns were nestled within that same level.

Regardless, by now you should know exactly how your investments have performed over the past 11 months. Furthermore, you should be able to assess whatever damage, if any, your portfolio may have sustained, along with what I hope are a series of substantial gains.

If you have an investment horizon extending out over several years, any “difficulties” (also known as unrealized or paper losses), will mean only a bit of psychological tsuris (Yiddish for aggravation).

When thinking about long-term performance, consider the guideline I give my students – a minimum compounded annual growth rate over 2-3 years of 10 to 13 percent, including dividend reinvestment. A prudent stock selection process should enable you to move in that direction and maybe even surpass it.

On the other hand, some believe that future stock market returns can be estimated summing nominal GDP growth with expected dividend yield. Using that formula with my current 2018 estimate of 2.6 percent nominal GDP growth, plus a 2.8 percent dividend yield, equals an expected long-term total return of 5.4 percent. That is not a satisfactory.

You must always to be compensated for investment risk. The accepted number is 3 percent. In addition, you need approximately 2.4 percent for inflation going forward, in addition to a 2.6 percent dividend yield. Add 4 percent for potential taxes and a little for the Gipper, and the result is 12 percent.  Therefore, you should be looking to chalk up a minimum annualized total return of around 12 percent over a 2 to 3-year period.

To achieve that result, you need an edge. You need to become a market-trouncing master strategist. Your knowledge of the companies in your portfolio must be superior to that of the great unwashed.

Although a buy-and-hold philosophy should always be your guiding light, not every investment works out. Occasionally you will take a loss. So be it. No one can make every investment call correctly. And if someone could I can assure you he or she would not tell anyone.

Now for a word of caution. Any time you have a strong upward run, as we have had this year, those predicting Armageddon will be out in force, painting a picture of doom and gloom and mesmerizing the media.

One key reason is the supposition that the odds are better calling for a down market than an up market. Sort of like betting on red at a roulette table in Las Vegas after black has come up several times in a row. (Each event, red or black is an independent random event, so doing so does not make sense.)

A major investment firm once said that the easy money has been made. Easy money? I always thought it was the result of hard work and diligent research.

I fault most soothsayers not because I believe they are usually wrong, that would be presumptuous. Rather it is their lack of confidence in companies with a long history of rising revenues, earnings and dividends that have shown their resilience to economic and interest rate ambiguities.

Looking ahead into 2018, and I will write about the upcoming year in greater detail in the weeks ahead as my crystal ball becomes clearer, the current economic data suggests an even more profitable 2018 than we had this year. My current projection suggests the economy will grow at a rate of about 2.6 percent. If my projection is even close, we should see a continuation of the bull market, even without tax reform.

However, should Congress pass tax reform bill with lowers corporate taxes and enables a repatriation of funds from abroad, the result could be a remarkable equities market.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.